Skyworks Solutions (NASDAQ:SWKS) is in a spot of bother as weak demand for its mobile chips led to a slight decline in its revenue during the fiscal third quarter. But that didn't keep it from raising its dividend. Skyworks management decided to boost the quarterly dividend by 19% to $0.38 per share. This is surprising, as the company's outlook doesn't inspire much confidence.
Skyworks expects its fourth-quarter revenue to rise just 1.6% annually at the midpoint of its guidance range, while adjusted earnings per share are expected to rise just 5%. This is in stark contrast to the same period last year, when the company's revenue increased 18% and adjusted earnings shot up 22%.
It looks like Skyworks is trying to prop up investor confidence by increasing its dividend and deflecting attention from the challenges that it faces in the mobile business, which supplies 70% of its total revenue. But is this the right way to go at a time when the company's primary business is struggling?
How the numbers look
Skyworks' latest increase puts its annual dividend outlay at around $276 million, as it currently has around 182 million shares outstanding. The company is well-placed to cover this obligation thanks to its debt-free balance sheet and a strong cash position of $1.6 billion. However, the company's facing problems on other fronts.
Skyworks has generated approximately $914 million in net income over the past year. The company claims that its earnings could increase at least 10% over the next year, but that looks like a stretch given how things have been going over the past couple of quarters. Assuming that the company's earnings grow 5% over the next year and there are no further dividend hikes, Skyworks could generate nearly $960 million in earnings.
This would put the company's dividend payout ratio at nearly 29%, which looks manageable. At the end of the previous fiscal year, which was just three quarters ago, Skyworks' dividend payout ratio was much lower at 21%. This isn't surprising, as Skyworks' GAAP net income has actually dropped nearly 13% this year, while adjusted earnings have increased just 12% during the first nine months of the year.
Skyworks' free cash flow also dropped nearly 10% year over year during the first nine months of the current fiscal year thanks to a 42% jump in its capital expenditure. Management attributes this substantial spike in its capital outlay to its investments in 5G chips and the Internet of Things (IoT) markets, which have started contributing substantially to its top line of late.
As such, Skyworks has paid nearly 24% of its free cash flow in the form of dividends in the nine months of this fiscal year, up from the 19% it was paying out in the prior-year period. So it can be concluded that despite the earnings slowdown, the company's dividend looks safe because of two reasons.
First, it has a solid balance sheet and a conservative payout ratio that should help sustain the current dividend level. And second, Skyworks' non-mobile businesses are gaining solid traction, and they should help bring its growth back on track.
Pulling the right strings
Skyworks is diversifying its revenue streams by moving into the IoT and 5G markets. The chipmaker groups these two areas into the broad markets business segment, which is now supplying 30% of its revenue. Skyworks' broad markets revenue increased 11% annually during the last-reported quarter, so it has the potential to steady the ship.
The good part is that Skyworks' broad markets business should keep getting better thanks to the string of impressive partnerships it has struck. Businesses including Cisco, Sierra Wireless, BMW, General Motors, and Nest are using its connectivity chips across several verticals, such as enterprise networking, machine-to-machine connectivity, smart homes, and automotive connectivity.
Skyworks is also trying to gain traction in the nascent 5G market. The company has already launched new antenna tuners through the latest Sky5 platform, which should gain adoption once 5G smartphones start hitting the market.
This could be a big opportunity for Skyworks. Strategy Analytics estimates that 5G smartphone shipments are expected to begin in 2019 and gain huge traction by 2023, as the number of 5G subscriptions could reach 600 million, driven by investments in China, the U.S., and South Korea.
Still a solid dividend play
Skyworks Solutions has the necessary catalysts to fire up its growth engines. More importantly, the company is comfortably positioned from a financial viewpoint, which means that it can continue paying its new dividend while it works to boost its broad markets business. Once that happens, it won't be surprising to see Skyworks returning more money to investors in the form of dividends.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Sierra Wireless, and Skyworks Solutions. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.