Written by Nick Ackerman
Texas Instruments (TXN) fell along with the rest of the tech space. Although it is an older, mature company with a wide moat, it has always been responsive. The stock is down 15.5% from its 52-week high as you type this. I think this opens up an opportunity for an investor in long-term dividend growth. TXN continues to deliver in the area of dividend growth thanks to its strong earnings growth that has supported these shareholder-friendly actions. It’s a place that hasn’t gone down, even though the stock price has.
I don’t believe TXN is the most exciting semiconductor stock. It’s not in the “cool” areas where Intel (INTC), Advanced Micro Devices (AMD), and NVIDIA (NVDA) compete. Where they make chips for PCs and servers. This is precisely what makes TXN a bit interesting, in my opinion. They produce analog and embedded chips that go into everyday objects. In about 80,000 different products, that’s what they say!
To give a quick overview of the business, they were founded in 1930 and have employees and operations all over the world.
TXN operates through three different segments. This includes analog, embedded, and “other” processing. Analog is by far their largest category in terms of revenue and operating profit. Within this, the industrials, personal electronics and automotive categories accounted for the bulk of their revenue in 2021. They noted that industrials and automotive accounted for 62%. Suffice to say, these are important categories for this stock.
Demand for automobiles only seems to grow year on year, so I don’t see this market shrinking any time soon. I also don’t see a significant drop in demand for personal electronics, although it is a drop in recent revenue. Mainly due to the good performance of the previous year, one can only have a limited number of mobile phones, computers, tablets and televisions. These were the types of personal electronics that were being fervently purchased with stimulus money.
Summary of Texas Instruments Earnings and Looking Ahead
They announced their fourth quarter and full year 2021 results on January 25, 2022. This was an EPS and revenue beta. Revenue was up 18.4% year over year, which was pretty impressive. They said the industrial and automotive markets were a key driver, with analog revenue growing 20%, with the in-vehicle processing segment growing 6%.
Despite the impressive fourth quarter results, revenue growth for the full year was even more impressive.
EPS for the full year was $8.47, compared to EPS of $6.23 in 2020, resulting in EPS growth of nearly 36% for the year. Operating cash flow increased significantly over the year by 43% and free cash flow increased by 15%. As a percentage of revenue, free cash flow fell from 38% to 34.3%.
A significant increase in capital expenditures put pressure on the business. However, this was related to their purchase of LFAB of approximately $900 million. LFAB is a fabulous factory that they bought from Micron (MU). The idea is that you have to spend money to make money; this will help TXN meet customer demand in the future. It was mentioned on their call that they had confirmed with the customers the need for more chips – which seems almost obvious but still good to confirm.
Discussions with customers confirm a high level of interest in our commitment to expanding our in-house manufacturing capability roadmap, including 300 millimeter wafer fabs; RFAB2 and LFAB; our recently announced plans for a multi-fab site in Sherman, Texas; and associated assembly test extensions. These investments, intended to strengthen our competitive advantage in manufacturing and technology, will reduce costs and better control our supply chain.
Analysts believe that EPS will grow further. However, they don’t seem too optimistic for the next two years. As generally expected, revenue growth appears to be equally slow.
The argument here is that these estimates are often low. Evidenced by the last 16 earnings reports that have exceeded analysts’ expectations on the EPS side. They have only missed 4 of the last 16 quarters on the revenue side. The last time was Q3 2021 – before that it hadn’t been since Q3 2019. That’s a pretty solid record of outperformance.
On top of that, they already gave Q1 2022 guidance that was above analysts’ expectations. It was $1.87, expected on $4.9 billion in revenue.
Let’s move on to our outlook for the first quarter. We expect TI revenue to be between $4.5 billion and $4.9 billion and earnings per share between $2.01 and $2.29.
TXN – A Dividend Machine
While earnings can be expected to grow more slowly according to analysts compared to what the company experienced in 2021, we can still expect to see increases for shareholders.
This is one of their main goals to provide returns to investors. They paid out $1.1 billion in dividends to investors, with 2021 being the 18th consecutive year of dividend increases. They mentioned that the dividend “represented 62% of free cash flow, underscoring its sustainability.” This tells me that they are more than comfortable with their situation in terms of coverage. The annualized dividend is currently $4.60. In terms of EPS coverage, we are looking at a ratio of 54.3% based on last year’s earnings. On a forward-looking basis, we’re looking at around 49.7%.
Prior to the last 18 years, they emphasized stock splits rather than putting more capital directly into shareholders’ pockets via dividends. These days, we just don’t see as many stock splits as we used to, which I wouldn’t complain about, as we see dividend growth instead. The last stock split they had was in 2000 with a 2 to 1 ratio.
The past 10 years have provided a dividend growth rate of 21.88%. That puts it well above the industry median of 10.81%. Similarly, we are seeing roughly double the growth in dividends in the 3- and 5-year CAGR levels compared to the sector median as well. To be fair, it comes down to competing with names like AMD and NVDA. These companies invest more money in growing their business rather than focusing on money for shareholders. AMD pays no dividend, which is quite common for this industry, and NVDA pays a token dividend.
TXN Stock Valuation Latest Drops
As I mentioned on the open, the stock’s valuation has fallen significantly thanks to its drop of around 16.7% from the 52-week high. It’s not always great to see one of your stocks decline so badly; however, this may also represent a better time to add to a position. Not to mention, this also means the dividend yield has been pushed higher, with the latest at a forward yield of 2.6%. We should expect another increase in the fourth quarter of 2022; this is usually when they announce their raise.
We also can’t ignore how much this stock has risen from 2020 lows. An investor who bought stocks a few years ago is still sitting in a very comfortable position.
The forward P/E for TXN comes in at 18.45 – which is also reasonable based on some of its semiconductor peers. The only stock price below TXN’s current P/E is INTC, which we know is going through a turnaround that has investors skeptical.
Based on its own history, the P/E is also quite reasonable to provide context on where the stock is trading right now. Over the past ten years, the stock has averaged a 22.69 P/E. The latest price pressures are pushing the current P/E below this level. As we can see, a short time ago we were trading above this level for most of 2021.
I believe TXN’s actions have been punished along with most tech names. However, other tech names remain expensive even after their decline. TXN has been pushed to a reasonable valuation so investors can take an initial position. That being said, the tech space could remain under pressure, and I have a feeling market volatility could play out a bit steadily for 2022. That’s why one might want to take smaller positions over time. before committing to a full position all at this time. In the meantime, we can take advantage of the quarterly dividends that TXN has generously increased.