Why Skyworks Solutions, Inc. Could Be a Gold Mine for Income Investors

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Skyworks Solutions, Inc. (NASDAQ: SWKS) likes to say it "is empowering the wireless networking revolution." While those are heady words, they might not be far from the truth. The company's innovative analog semiconductors enable devices like smartphones, wearables, and smart-home systems to stay connected.

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The company stands poised to capitalize on huge trends like the jump to 5G and the growth of the Internet of Things (IoT). In its most recent quarter, the company showed strong annual revenue and earnings-per-share (EPS) growth, up 18% and 15%, respectively, and guided for more double-digit percentage growth in the quarter ahead. On the surface, at least, Skyworks Solutions seems to have a lot going for it.

It might be odd to think of a stock with a seemingly paltry 1.35% dividend yield as an income play, but there is more to dividend growth stocks than just a cursory glance at their yield. Skyworks Solutions grew its dividend by a healthy 14% this year. While double-digit increases are nothing to sneeze at, this year's growth does not reflect the explosive growth Skyworks' dividend has seen in recent years. Since 2015, it has increased its dividend by a whopping 146%! Let's take a closer look at the company's business prospects and fundamentals to see why I believe income investors should not ignore this reasonably priced and fast-growing dividend stock.

SWKS Dividend data by YCharts

Two huge tailwinds ahead

Skyworks Solutions finds itself perfectly situated to capitalize on two huge coming trends: the explosive growth of the IoT and the massive upgrade to 5G wireless networks. Research firm IDC thinks worldwide spending on the IoT could increase to $1.4 trillion by 2021, up from $800 billion this year. In the Skyworks' fourth-quarter conference call, CEO Liam Griffin said there could be as many as 75 billion connected devices by 2025. These devices will include everything from wearables and smartphones to cars and refrigerators. These applications could not be possible without the type of connectivity solutions Skyworks offers.

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In addition to IoT, wireless networks will begin to be upgraded to 5G as soon as next year. Last month, Verizon Communications Inc (NYSE: VZ) announced it would be rolling out the next generation in wireless networks in three to five domestic markets in 2018. In the company's fourth-quarter conference call, Griffin said 5G networks could be as much as 100 times faster than existing networks. This matters to Skyworks shareholders, because the solutions it designs for 5G networks are more profitable for the company than the chips it designs for networks of lesser speeds.

In other words, as 5G wireless networks come online and the IoT continues to develop, Skyworks Solutions will sell more expensive chips in phones and provide more connectivity solutions to an ever-increasing number of devices. That's not a bad place to be for any company!

So about that dividend...

Skyworks Solutions first caught my eye as an income investment in 2015, when it raised its dividend by 100%. It followed up that massive hike with a modest 8% raise in 2016 and a robust 14% increase this year. In this year's third-quarter conference call, transcribed by S&P Global Market Intelligence, CFO Kris Sennesael noted the company's strong balance sheet and said the goal is to give back about 40% to 50% of free cash flow to shareholders via dividends and repurchasing shares:

I feel good about the balance sheet. We have $1.4 billion of cash and no debt ... I feel really strong about our ability to generate cash. On a year-to-date basis, our free cash flow margin is approximately 31% ... [I]n terms of returning cash to the shareholders, our stated goal is that we want to return 40% to 50% of the free cash flow back to shareholders using our dividend program and share buyback program ... We are very active with our share buyback program. Last quarter, we repurchased 1.3 million shares, $129 million. And we have our dividend program which we announced today, that we increased it by 14%, increasing the dividend from $0.28 per share to $0.32 per share.

Even though Skyworks has increased its dividend every year since initiating it in 2014, it still sports a low payout ratio. In its 2017 fiscal year, Skyworks reported $5.41 in EPS (on a GAAP basis), and it's projected to pay out $1.28 in dividends per share this year at the current quarterly rate of $0.32 per quarter. This means its payout ratio is only 24%! That leaves plenty of room for the company to buy back shares, reinvest for growth, and raise the dividend in the future as long as the company does not suffer a sudden and dramatic decrease in earnings. Given its position to benefit from 5G networks and the growth of IoT, such an event seems remote, to say the least.

While Skyworks Solutions offers a below-average dividend yield, I believe it will be able to grow its dividend quickly as its earnings increase. Given its low payout ratio, this should not be an issue even in years it misses guidance or shows low growth. The company is still reasonably priced, too: On a GAAP basis, it is currently trading at a price-to-earnings ratio of 17.5, well below the S&P 500's average. On a non-GAAP basis, it's a downright bargain with a P/E of only 14.6. In a bull market getting long in the tooth, it is becoming increasingly difficult to find a company showing strong growth, selling at a reasonable price, and featuring a dividend that has lots of room to grow in the years ahead.

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Matthew Cochrane owns shares of Skyworks Solutions and Verizon Communications. The Motley Fool owns shares of and recommends Skyworks Solutions and Verizon Communications. The Motley Fool has the following options: short January 2018 $105 calls on Skyworks Solutions. The Motley Fool has a disclosure policy.