Texas Instruments demonstrates strong capital allocation skills while maintaining its leadership position in the analog semiconductor market. The company’s strategic investments in cost-efficient 300mm wafer facilities, backed by substantial government support, position it perfectly for future growth.
Strong free cash flow projections and consistent dividend growth showcase the company’s operational excellence, making it a top pick for the long run.
Meanwhile, the stock trades at 30.9 times the company’s forward earnings forecast, a multiple justified by its high research spending, dominant market position, and superior manufacturing efficiency.
TEXAS INSTRUMENTS INC. (Nasdaq symbol TXN; www.ti.com) makes analog computer chips, which convert touch, sound and pressure into electronic signals.
Analog chips accounted for 74% of the company’s 2023 revenue.
Texas Instruments gets a further 19% of its revenue from embedded processor chips, which perform mathematical calculations. Many clients supply their own software for these chips. This gives Texas Instruments an opportunity to form long-term relationships with these users, as it helps them adapt their software to the new chips. That makes these customers less likely to switch to other chipmakers. The remaining 7% of revenue comes from calculators and licensing of the company’s technology to other firms.
The company sells its products to a wide variety of customers, which cuts its exposure to any single industry. Sales to manufacturers of industrial products accounted for 40% of its 2023 revenue, followed by makers of automotive products (34%), personal electronics (15%), communications equipment (5%), datacentre computer systems (4%), and other products like calculators (2%).
Texas Instruments recently adjusted its capital spending plans as it builds a new facility in Sherman, Texas. That site will house as many as four new chipmaking plants. Cutting capital spending was a key demand of activist investor Elliott Investment Management, which controls about $2.5 billion worth of Texas Instruments’ shares.
In all, costs to build these plants could reach $30 billion. However, the U.S. government will contribute $1.6 billion under the U.S. CHIPS and Science Act. The company will also receive between $6 billion and $8 billion in tax credits. The new facilities should begin operating in 2026.
The new plants will use 300-millimetre wafers to make chips, which cost 40% less than the 200-millimetre wafers of its competitors. The company expects these facilities will begin operating in 2026.
Texas Instruments: Management maintains strong 4.6% payout growth
With its new approach, Texas Instruments will base its capital outlays on customer demand. For 2026, it sees capital expenditures of $2 billion to $5 billion, down from its previous plan to spend $5 billion annually through 2026.
As a result of the lower expected spending, Texas Instruments expects its free cash flow (regular cash flow less capital expenditures) per share will range between $8 and $12 by 2026, which is higher than the $6.91 consensus estimate. That will give the company more room to reward investors with share buybacks and higher dividends.
Meanwhile, in the quarter ended September 30, 2024, revenue fell 8.4%, to $4.15 billion from $4.53 billion a year earlier. That’s mainly because of weaker demand from its industrial customers. Earnings also fell 20.5%, to $1.47 a share (or a total of $1.36 billion) from $1.85 a share (or $1.71 billion).
With the November 2024 payment, Texas Instruments increased your quarterly dividend by 4.6%, to $1.36 a share from $1.30. The annual rate of $5.44 yields 2.9%.
The company’s earning will probably rise 17% to $6.07 a share in 2025, and the stock trades at a high 30.9 times the estimate. Still, the multiple is reasonable given Texas Instruments’ high research spending (12% of revenue).
Recommendation in Wall Street Stock Forecaster: Texas Instruments Inc. is a buy.
