Texas Instruments faces pressure from activist investor over $30Bn expansion plan

Activist investor Elliott Management has a long history of improving value at undervalued companies. The firm is now targeting this company. We agree with its opinion and continue to recommend the firm as a strong buy.

The stock trades at 37.0 times the company’s forward earnings forecast. However, we feel this is acceptable when considering cash flow projections and the firm’s high R&D spending.

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TEXAS INSTRUMENTS INC. (Nasdaq symbol TXN; www.ti.com) makes analog chips, which convert touch, sound and pressure into electronic signals that computers can understand.

Texas Instruments is now building a new facility in Sherman, Texas, to house as many as four new chipmaking plants. In all, the development costs could reach $30 billion. The new plants will use 300-millimetre wafers to make chips, which cost 40% less than the 200-millimetre wafers of its competitors.

Activist investor Elliott Investment Management recently announced that it now controls $2.5 billion worth of Texas Instruments’ shares. Elliott wants Texas Instruments to scale back the construction of new plants, as it feels the future demand for those chips is not as strong as the company predicts. The activist claims that would increase Texas Instruments’ free cash flow (regular cash flow less capital expenditures) to about $9.00 a share in 2026, which is 40% more than current forecasts.

The company has not yet responded to Elliott’s demands. However, the pressure will probably prompt it to look at ways to improve free cash flow, which would benefit all investors.

Dividend Stocks: High R&D spending justifies the high valuation

The news also helped lift the stock to a new all-time high of $210.84 recently. It now trades at a high 37.0 times the $5.29 a share that the company will probably earn in 2024. Still, that’s a reasonable multiple in light of Texas Instruments’ high research spending—equal to 13.0% of the company’s revenue in the latest quarter.

With the November 2023 payment, Texas Instruments increased your quarterly dividend by 4.8%, to $1.30 a share from $1.24. The annual rate of $5.20 yields 2.7%.

Texas Instruments has raised your dividend by an average 11.0% annually over the last 5 years. The company’s TSI Dividend Sustainability Rating is Above Average.

Recommendation in Wall Street Stock Forecaster: Texas Instruments Inc. is a buy.

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Jim Bates

Jim is an associate editor at TSI Network. He is the lead reporter and analyst for The Successful Investor and Wall Street Stock Forecaster and a member of the Investment Planning Committee. Jim has held the Chartered Financial Analyst designation since 1992 and spent more than a decade at the Financial Post DataGroup before joining TSI Network. He has a Bachelor of Commerce degree from the University of Toronto.

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