An Overview of Analog and Embedded Semiconductor Stocks
For those who are interested in dividends, dividend growth, and the potential of technological advancement, analog and embedded semiconductor stocks are worth considering. These stocks are considered to be capital-light as they do not require high capital investments compared to leading-edge logic and memory plants.
Long-Lived and Dependable Revenue Streams
Analog and embedded chips are used in complex machines such as airplanes, cars, and factory equipment. These chips have long-lived and dependable revenue streams due to the complexity, temperature, and pressure requirements, and long development cycles of the equipment they are used in. According to McKinsey, automobile and industrial semiconductors are projected to grow 13% and 9% on an annualized basis through 2030, making them the two highest-growth subsectors in the semiconductor industry.
Microchip’s Rapid Growth
Microchip is growing faster than Texas Instruments, with a revenue growth of 23.4% over the past quarter, compared to Texas Instruments’ 3% decline. In the nine months ending in December, Microchip grew revenue by 24.7%, while Texas Instruments grew revenue by 9.2%. Microchip has also guided for a sequential increase in both the March and June quarters, while Texas Instruments has guided for a sequential decline in revenue.
Texas Instruments’ Better Yield and Balance Sheet
Microchip’s growth has come from large acquisitions, such as the acquisition of Atmel for $3.56 billion in 2016 and Microsemi for $10.15 billion in 2018. These acquisitions have loaded Microchip’s balance sheet with debt, and it has been devoting a lot of its free cash flow to servicing the debt. On the other hand, Texas Instruments has a small net cash position and pays out all its free cash flow to shareholders in dividends and share repurchases. This is why Texas Instruments has a higher dividend yield of 2.7% compared to Microchip’s 1.7%.
Microchip’s Debt Pay-Down and Dividend Increase
Microchip is rapidly paying down its debt and raising its dividend at a faster pace than Texas Instruments. The company plans to return 62.5% of its free cash flow in dividends and repurchases next quarter, with the rest going towards debt pay-down. Microchip’s management plans to steadily increase the portion of cash flow going to shareholders, until 100% of the free cash flow is paid to shareholders in about eight quarters.
Diverging Manufacturing Strategies
Texas Instruments has announced a multi-year acceleration in spending to increase its internal manufacturing capacity. The company plans to spend $5 billion per year between 2023 and 2026, and then keep capital expenditures between 10% and 15% of revenue. This investment will support $45 billion in revenue by 2030. On the other hand, Microchip has announced that it will not be building its own internal 300mm capacity and instead will partner with third-party foundries to satisfy its 300mm demand.
The Best of Both Worlds
Microchip has invested heavily in acquisitions and is now reaping the benefits, while Texas Instruments is embarking on its own investment cycle with its large internal manufacturing investments. Given Microchip’s recent execution and Texas Instruments’ long-term growth potential, it may be a good idea to own both of these all-star chip stocks in a dividend growth portfolio.