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Amid a CEO Change, Texas Instruments Needs to Do This

The Motley Fool logo The Motley Fool 1/24/2023 Will Healy

On Jan. 19, Texas Instruments (NASDAQ: TXN) announced that longtime CEO Rich Templeton will step down on April 1. Haviv Ilan, the current chief operating officer (COO), will take over.

This move should not surprise anyone. Templeton has worked at the company since 1980, and he tried to transition out of the CEO role in 2018. Templeton also played a transformational role in his nearly 19 years as head of the company. That implies Ilan will probably increase his chances of success by doing one thing. 

How Templeton changed the company

Under Templeton's leadership, he refined the company's strategy when it came to semiconductors for signal processing. That meant transitioning it out of the wireless business and redoubling the focus on its core business of developing analog and embedded processors.

Templeton bolstered that business with the purchase of competitor National Semiconductor in 2011, which added to its manufacturing capacity and its portfolio of analog products.

Furthermore, he drove an aggressive capacity expansion. In recent years, that meant adding a manufacturing plant in Richardson, Texas; taking over a former Micron facility in Lehi, Utah; and beginning a $30 billion project to build four fabrication facilities in Sherman, Texas.

All that happened because Templeton's leadership made Texas Instruments tremendously more profitable over time. Net income grew from $1.8 billion in 2004, Templeton's first year as CEO, to $7.8 billion by 2021.

This drove a total return for the stock of more than 930% under his tenure, well more than double that of the SPDR S&P 500 ETF Trust. And even with those gains, the price-to-earnings (P/E) ratio of 18 puts its valuation near multiyear lows, a factor that could attract more interest in the stock.

TXN total return level; © YCharts TXN total return level;

Templeton also turned it into a dividend growth company, taking the annual payout from $0.089 per share in 2004 to $4.96 per share today. That amounted to a 25% compound annual growth rate from 2004 to 2021, making it one of the more notable dividend-paying tech stocks.

What his successor should do

For the aforementioned reasons, Ilan probably needs to stay the course, maintaining Templeton's legacy.

Emerging technologies such as 5G, artificial intelligence, virtual reality, the Internet of Things, and the increasing importance of automotive chips continue to drive higher demand. And since digital chips cannot work without the supporting analog chips that Texas Instruments manufactures, the company needs to continue adding capacity.

Fortunately, Ilan is likely the right person to keep the company on its current path. He has worked there since it bought his former company, wireless start-up Butterfly, in 1999. Also, before becoming COO, he held leadership roles in Texas Instruments' analog and embedded processing businesses.

Moreover, Templeton will stay with the company as its chairman. That should ensure an orderly transition and increases the likelihood that Templeton's legacy will outlast his time with the company.

Texas Instruments' future

Assuming Ilan stays the course, investors should feel comfortable holding Texas Instruments stock. And given the low P/E ratio and rising payouts, shareholders might also consider reinvesting dividend income or buying additional shares.

Under Templeton, the company has grown profits, added capacity, and delivered outsize returns for holders of the semiconductor stock. So minimizing any uncertainty associated with this transition is likely best for shareholders. If Ilan can maintain Templeton's legacy, Texas Instruments stock should profit investors for a long time to come.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Texas Instruments. The Motley Fool has a disclosure policy.

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