The advent of fifth-generation (5G) wireless technology is turning out to be a boon for chipmakers. Semiconductor stocks have been flying high in recent months after a terrible performance last year, and this is just the beginning as we come to the beginning of the 5G deployment cycle. In fact, market-intelligence firm IDC estimates that spending on 5G infrastructure will jump to $26 billion in 2022 from $528 million last year.
The likes of Skyworks Solutions (SWKS +3.41%) and Xilinx (XLNX +0.00%) stand to gain big from this massive opportunity and potentially deliver a nice upside to investors in the long run. But the cherry on top is that both chipmakers also pay a dividend, which might increase as the 5G catalyst gains traction.
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Skyworks will have more ground to raise its dividend
Skyworks made a surprising move to increase its dividend in August last year, at a time when its crucial mobile business was on the ropes. The company's top- and bottom-line growth had dried up, and there wasn't much hope for a turnaround.
The good news is that Skyworks' 1.7% dividend yield is in the safe territory despite its weak results. Its revenue dropped 11% year over year last quarter, while net income shrank nearly 22% to $214 million, or $1.23 per share. For comparison, Skyworks paid a total of $66 million in dividends during the quarter at $0.38 per share. That means Skyworks paid out nearly 31% of its earnings in the form of dividends.
In the prior-year period, Skyworks had generated $276 million in net income ($1.50 per share) and paid $58.4 million ($0.32 per share) in dividends, translating into a payout ratio of just over 21%. So the chipmaker's dividend payout ratio has shot up considerably of late, though it is still in safe territory. And it could go higher as earnings are expected to take a hit this fiscal year, according to Yahoo! Finance analysts.
But those analysts also forecast a double-digit increase in Skyworks' earnings next fiscal year, so Skyworks' dividend payout ratio could fall. This will also pave the way for further dividend increases as Skyworks stands to win on multiple fronts from the 5G revolution.
For instance, demand for the company's smartphone chips will start picking up the pace as new 5G devices hit the market. At the same time, demand for Skyworks' small cell solutions will also get a shot in the arm. Small cells will play a crucial role in the deployment of 5G networks as they enable high-speed connectivity across a wider area by decongesting the network.
The good news is that demand for small cell solutions is expected to balloon in the future, hitting $58 billion in 2024, compared with $12.5 billion a couple of years ago. Such massive end-market opportunities will boost Skyworks' bottom line in the long run, paving the way for more dividend growth.
Xilinx is on a hot streak
While Skyworks is on the cusp of a 5G-driven turnaround, Xilinx is already enjoying impressive financial growth thanks to the deployment of 5G networks. The company's revenue was up 30% last quarter, and its earnings had increased 34%. The communications business, which accounts for 41% of the company's total revenue, increased 74% year over year thanks to 5G-related demand.
Last year, Xilinx paid a cash dividend of $1.44 per share on diluted earnings of $3.47 per share, translating into a dividend payout of ratio just over 41%. Given the pace at which Xilinx's earnings are growing, the chipmaker's payout ratio is on track to drop further.
What's more, Xilinx generated operating cash flow of $1.1 billion last year. Out of that, it paid $364 million in dividends. Looking ahead, Xilinx's earnings growth is expected to accelerate in the next two fiscal years, recording double-digit increments for both years.
That's not surprising, as Xilinx is taking steps to take advantage of the 5G catalyst for as long as possible. The company has enhanced its product portfolio by adding new chip platforms to address 5G demand. For instance, its next-generation Versal chip is programmable at both the hardware and software level, which means Xilinx can modify them to act like custom-made 5G chips that telecom companies can deploy.
But 5G isn't the only catalyst that's going to drive up Xilinx's earnings. The chipmaker has made serious inroads into the automotive segment, striking partnerships with 16 automotive original equipment manufacturers that are using Xilinx's advanced driver assistance system (ADAS) modules. With the ADAS market slated to turn in an annual earnings growth rate of 19% through 2025, Xilinx's automotive business has more room to grow.
Xilinx currently has a dividend yield of 1.2%. It has increased the dividend for eight years, at an average rate of 5.4% for the past three years. So as the earnings growth rate accelerates, Xilinx will have more scope to increase the dividend.
In the end, investors need to understand that both these stocks are at the beginning of the 5G growth curve. Xilinx is already showing us what the 5G catalyst can do for the business, and Skyworks could soon be following that path. That's why both companies are expected to have nice earnings growth in the future, paving the way for a fatter dividend.
