Why Texas Instruments Dropped 5% on Earnings Day

Texas Instruments beat both earnings per share and revenue growth expectations. The company even reported double-digit revenue growth!
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Last week, one of my favorite tech dividend growers got seriously hurt on the stock market. Texas Instruments (TXN) lost about 5% of its value on its earnings day last week (July 21st).

Texas Instruments Stock Price

Texas Instruments Stock Price

So what happened? Were results that bad? In fact, Texas Instruments beat both earnings per share and revenue growth expectations. The company even reported double-digit revenue growth! We’ll discuss why the stock price dropped later on in this article.

TXN shows 16 consecutive years with a dividend increase and has boosted its payout from $0.38/share in 2017 to $1.02 in 2021 (+168%). The company is suffering from chips shortage, but it is still time to add this tech dividend grower to your portfolio.

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The Company in a Nutshell

  • Texas Instruments’ dividend is growing rapidly.
  • This business has several growth vectors to keep rolling for a good decade.
  • Notably, TXN’s chips will be in high demand for electric vehicles.

Business Model

Dallas-based Texas Instruments generates about 95% of its revenue from semiconductors and the remainder from its well-known calculators. Texas Instruments is the world's largest maker of analog chips, which are used to process real-world signals such as sound and power. Texas Instruments also has a leading market share position in digital signal processors, used in wireless communications, and microcontrollers used in a wide variety of electronics applications.

Source: TXN website

Source: TXN website

The company that is also known for its famous calculators we all used when we were students went a long way to build its expertise in analog chips helping the industrial and automotive sectors to get “smarter”. The internet of things plays a big part in Texas Instruments’ growth plan.

Investment Thesis

Texas Instruments

Texas Instruments

TXN has the size (about $170B in market cap) to benefit from economies of scale and stay ahead of their competition. The company has leading market shares in both analog chips and digital signal processors. While there has not been much revenue growth over the past few years, the company’s future looks bright. TXN benefitted from a fragmented market to purchase many manufacturers at a low price and consolidate its position in the analog chip business. With the rise of the Internet of Things, its chips will have the possibility of being used in various other industries in the future. The company is also investing massively in R&D and its marketing sales team. These actions enable TXN to secure more customers and generate additional cross-selling opportunities as its sales team is out in the field to push revenues to higher levels. Finally, TXN enjoys a sticky business as it works constantly with its customers to build embedded analog chips.

Potential Risks

The personal electronics segment is always at risk. Chips evolve rapidly and there is significant competition. It used to be TXN’s largest segment in 2013 (32% of sales) but is now down to a 2nd position. TXN put its energy into developing longer life cycle chips in the industrial and automotive sector. This looks like a good move for the long haul. TXN must battle against other tech giants such as Microchip and Broadcom. There is room for everybody, but margins could get hurt. Also, both industrial and automotive sectors are cyclical and could hurt TXN fundamentals in a few years.

Dividend Growth Perspective

Texas Instruments

Texas Instruments

TXN is not only a long-time dividend grower, but it is also a super-powered dividend stock. Over the past five years management has increased its dividend at a 20% annualized rate. While its distribution rate skyrocketed, both payout and cash payout ratios remain under control. Management uses about 50% of its cash flow for dividend payments, thereby leaving plenty of cash for R&D and sales growth. The 2019 and 2020 dividend increases (+17% and +13% respectively) shows management’s confidence in the company’s future. You can expect lower increases in the upcoming years, but TXN will remain a solid dividend payer with a decent yield.

What Happened this Quarter?

It's funny how the market reacts sometimes. On earnings day, TXN was down even though it beat both EPS and revenue growth expectations. Analog revenue grew 6% and Embedded Processing grew 2% sequentially. From a year ago, Analog revenue grew 42% and Embedded Processing grew 43%. While the growth vs last year is mostly related to COVID lockdown in 2020, TXN shows a sequential revenue increase of 7% vs last quarter.

The CEO said:

"Our cash flow from operations of $7.5 billion for the trailing 12 months again underscored the strength of our business model. Free cash flow for the same period was $6.5 billion and 39% of revenue. This reflects the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter Analog production."

What was the problem then? Soft guidance! You know how the market could overreact when a company doesn’t provide the right numbers. That’s what happened here. For the next quarter, TXN forecasts revenue of $4.4-4.76B compared to the $4.59B consensus. Adjusted profit is expected to come in between $1.87 and $2.13 versus the $1.97 estimate. As you can see, it’s not that terrible. Still it was enough to create a 5% pullback on earnings day.

Final Thought

With a PE ratio above 25 and a 12 month forward PE ratio of 23.4, we can’t scream at a bargain here.

Texas Instruments

Texas Instruments

However, considering the company shows several growth vectors for the years to come and its dividend growth policy is backed by a robust dividend triangle, I think TXN is a great addition for any dividend growers. The stock price drop of 5% is nothing dramatic and I only hope it helped putting this great company on your radar.

I bought shares of TXN in 2017 and I still hold them to this date.

Cheers,

Mike Heroux, Passionate Investor & founder of Dividend Stocks Rock

P.S. Are you concerned by the current state of the market? Download my free DSR Recession-Proof workbook and make sure you don’t suffer during the next market crash.

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