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Is This World Leading Chip Maker A Buy As We Begin To Put Chips Into Everything?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today we dig in deeper to the trillion dollar plus Internet of Things trend and I answer – Is This World Leading Chip Maker A Buy As We Begin To Put Chips In Everything?

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Texas Instruments (TXN) isn’t just a calculator company anymore – even though they still generate 5% of revenue from their world-famous calculators.

95% of its revenue comes from its semiconductors.  It’s the worlds leading maker of analog chips which are used for things like processing sound and power.

And it’s also a world leader in “digital signal processors” which are used for wireless communication and electronics.

All of which will benefit enormously from the Internet of Things which I’ll talk about further below.

It’s based in Dallas Texas.  It has a $165.14 billion market cap. And it pays a 2.3% dividend which is reason #1 to consider buying its stock.

Texas Instruments 2.3% Dividend

Over the last decade Texas Instruments paid out a total of $18.31 per share in dividends.

At today’s share count of 933 million, that’s equal to $17.08 billion paid out to shareholders in that time.

Plus, it grew its dividend from $0.56 per share in 2011 to $3.72 per share now which is a total growth rate of 564% since 2011.

These regular payments help you earn more money for your retirement.  And they’ll help you in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns large profits.  Which is reason #2 to consider buying Texas Instruments stock.

Texas Instruments Earns Large Profits

Yesterday I told you why you should consider buying enormously profitable Altria largely due to its huge profits and competitive advantages.

Today with Texas Instruments we’re dealing with another world class business.

Over the last decade it earned an average operating income margin of 34.8% per year.  

I look for anything above 10% consistently so this is fantastic… But its also not the true story either.

At the earlier part of the last decade Texas Instruments operating profit margin was in the 21% to 34.9% range… Which is great.  But since then, its improved.

From 2016 to today in early 2021, its operating profit margin is now averaging 42.1% every year for the last 5 years.

This is spectacular and makes it one of the most consistently profitable companies in the world.

To put this into context… This means for every $1 in sales Texas Instruments does, it produces $0.421 in operating profit.

Another way I look at how profitable a company is by looking at its free cash flow to sales (FCF/Sales) margin.

Over the last decade this averaged 29.9%.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is both safe and ultra-valuable.

Again, this is already great but it’s not the full story.

From 2016 to today this averaged 35.68%.  Which again, makes it one of the most profitable companies on Earth.

Why look at these two metrics instead of net income – or earnings – like most people do?

Two reasons…

  1. Net income is far easier to manipulate than operating income or free cash flow.

If you have good enough lawyers and accountants, you can make your net income about whatever you want to by using things like tax credits and loopholes.

  1. Any time I evaluate a stock, I look at it as if I were to own the entire company.  And doing that I want to know the actual profit a company produces from its operations.

Which is what operating income and FCF/Sales show you.

Texas Instruments surpasses both ultra-important metrics. This not only means it’s a world class business operation.  But it also adds an enormous margin of safety to potentially buying its stock.

Another benefit of huge profits and cash flow… It also allows Texas Instruments to have low debt levels.

Texas Instruments Has Low Debt

As of this writing it has $6.57 billion in cash compared to $7.05 billion in debt.

As a percentage of its balance sheet, total liabilities make up only 52.5%.

Debt makes up 4.2% of its market cap.

And its debt-to-equity ratio is 0.71.

These are all far below what I look for.  And add another gigantic layer of safety to potentially buying Texas Instruments stock.

For example, I look for stocks that have a debt-to-equity ratio below 1.  And debt levels as low as possible compared to cash and profits.

Why?

Because when you have lower debt – and in this case huge profits – it makes it almost impossible for the company to go out of business.  This adds enormous safety to buying Texas Instruments.  This is especially important with all the uncertainty going on today.

But what about its valuation?  Is it cheap enough to buy? 

Texas Instruments IS NOT Cheap

With the markets at or near all-time highs you’d expect a great stock like Texas Instruments to be selling at an enormous valuation.

Unfortunately, it is.

Its P/E is 30.3.

Its P/CF is 27.5.

Its forward P/E is 27.6.

And its EV/EBIT is 26.9.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These show that Texas Instruments is overvalued right now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

This is a deal breaker.

Because Texas Instruments is overvalued, it makes buying its stock enormously risky.  Especially when considering the absurdly high valuation of the stock market right now – and likelihood of a market crash happening because of this.

Due to this, for now I recommend you avoid buying Texas Instruments stock until its cheaper… But before I finish up you need to know another great thing in Texas Instruments future.

What Is The Internet Of Things?

I alluded to this at the beginning of the article but didn’t really explain what it was.

You no longer must leave your house to interact with people around the world in seconds.

You no longer must go to the grocery store and deal with lines and rude people.

And you can summon a car to take you places in seconds on your phone.

Most of this was unthinkable 10 years ago.

But now they’re part of our everyday lives.

And they’re becoming even more important as we’re locked in our houses during the pandemic.

In the coming years technology will change even faster with the implementation of The Internet of Things.

The Internet of Things is a time when almost everything we interact with daily will have microchips and sensors in it.

These sensors and chips will spit out data to us to help us improve potentially every aspect of our lives.

From helping get rid of rush hour traffic.

To helping us spot a health issue before it causes major problems in our bodies.

To spotting potential pandemics before they spread around the globe.

To making sure our food is fresh.

The Internet of Things will hook almost everything in our lives to the internet.  And this will transform our lives.

The Internet of Things is so big that by 2025 its estimated to be a $1.6 trillion market.

And chip makers like Texas Instruments as a world leader in microchips will be huge beneficiaries of this trend.

But I recommend you stay patient and wait to buy them until its shares are cheaper… Because then much of the risk is gone… And higher investment returns over time are almost guaranteed.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy, consider Texas Instruments… But only when its cheaper.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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