Skyworks Solutions (NASDAQ:SWKS) isn't generally known for its dividend, but the RF chipmaker's 1.7% yield is notably higher than that of its industry peers. Its smaller rival Qorvo doesn't pay a dividend, while its larger competitor Avago Technologies yields 1.4%. Let's take a closer look at Skyworks' dividend, how sustainable it is, and whether or not the company will raise its payout in 2016.
Payout ratio and dividend history
In fiscal 2015, Skyworks spent 64% of its free cash flow on dividends and buybacks, which exceeded its own target of 40%. On an EPS basis, Skyworks paid out 15% of its earnings as dividends, which is just half of Avago's payout ratio of 30%. While that might make Avago look more generous, it also means that Skyworks has much more room to raise its dividend.
Skyworks started paying a quarterly dividend of $0.11 in 2014. It raised it to $0.13 later that year, then doubled it to $0.26 after just three quarters. For fiscal 2016, which started last October, analysts expect Skyworks' earnings to grow 15% to $6.04 per share. If Skyworks raises its payout ratio to 30% to match Avago's, it could theoretically hike its dividend to $0.45 per share in late 2016. However, that's a best-case scenario which probably won't happen due to near-term headwinds.
Evaluating the headwinds
Over the past 12 months, Skyworks stock declined 15% due to concerns about its dependence on Apple's iPhone and Qualcomm's (NASDAQ:QCOM) interest in the RF market.
Skyworks doesn't disclose how much of its revenue comes from Apple, but Oppenheimer & Co. analyst Richard Schafer estimated last year that Apple accounts for 35% to 40% of Skyworks' sales. That's why Skyworks stock slumped after Apple announced that iPhone shipments only inched up 0.4% annually last quarter. Apple also warned that its second quarter sales could decline 8.6% to 13.7% annually.
In January, Qualcomm, the largest mobile chipmaker in the world, formed a joint venture with TDK to produce RF chips, sensors, and wireless charging technologies for mobile devices, drones, and other devices. This deal won't close until 2017, but if Qualcomm merges those new technologies with its mobile application processors and modems in cheap reference designs, smaller RF players such as Skyworks and Qorvo could get cut out of the loop.
Growing pains ahead
To decrease its dependence on Apple and upgrade its production capabilities, Skyworks needs to buy other companies. That's why its rival Avago agreed to buy Broadcom for $37 billion last year. Broadcom makes wireless radios for Apple and Samsung's mobile devices, but its chips are also installed in data centers. The acquisition will help Avago diversify its business while utilizing economies of scale to protect its margins.
Skyworks tried to follow Avago's footsteps by trying to acquire PMC-Sierra, a data-center chipmaker, for $2 billion last year. However, Skyworks was eventually outbid by Microsemi, which agreed to buy the company for $2.5 billion.
Looking ahead, Skyworks will probably need to make a big deal to remain competitive. It might consider merging with Qorvo, or buy up smaller players like Silicon Labs, Semtech, or Inphi. All those companies' market caps exceed the $1.2 billion in cash and equivalents Skyworks finished last quarter with, so the company will need to take on new debt to finance the deal. Such an acquisition could throttle Skyworks' free cash flow and its ability to raise its dividend.
Will Skyworks raise its dividend?
During Skyworks' fourth-quarter conference call, CFO Donald Palette stated that the company will "continue to look at annual dividend increases." Palette didn't say the same thing during the first-quarter call, but he reiterated that the company would still dedicate at least 40% of its free cash flow to dividends and buybacks.
Based on those statements, Skyworks will probably raise its dividend later this year. But looking ahead at the company's near-term challenges and its need for strategic acquisitions, I doubt that the increase will be as impressive as its 100% increase in 2015.
Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple, Qualcomm, and Skyworks Solutions. The Motley Fool recommends Silicon Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.