In my article "The Best Dividend Stocks: What To Look For?" I explained what I look for in dividend stocks. It's a combination of earnings growth, modest payout ratio and high dividend growth. I also look for stocks that are not in a declining business.
The biggest companies often underperform versus the market. In my previous article, I showed that companies that are in the second quintile of payout ratio (with an average of 41%) outperform versus the other quintiles.
In my last article, I highlighted TJX (TJX) as a very qualitative dividend grower with a long dividend history (just a few years away of dividend aristocrat status) and high dividend growth. Skyworks Solutions (SWKS), on the other hand, has a much shorter dividend history, but nevertheless, I think it is one of the best dividend stocks available for long-term investors.
Skyworks may not be on the radar of most traditional dividend investors because of several factors. Probably the most common one is that it only started paying a dividend in May 2014, which means it doesn't even have a dividend streak of five years.
The other factor that spooks a lot of dividend investors, in my opinion, is the fact that Skyworks is in one of the most volatile sectors: semiconductors. The prices of stocks in that sector often make huge swings up or down, depending on the moment in the cycle of continuing overdemand and overproduction.
A third reason why Skyworks may be off the radar for most dividend investors is that the stock, just as TJX, is often under the 2% yield threshold that many dividend investors see as a limit they don't go under, although just before the most recent earnings release (when I have bought my first batch of shares of Skyworks), the stock traded at 2.1% dividend yield.
But the ignorance is completely unwarranted. The fundamentals of Skyworks make me very confident that the dividend growth will go on for years, maybe decades, to come. And because most dividend growth investors are buy-and-hold practitioners, the volatility of the semiconductor sector shouldn't be a nuisance. On the contrary, you often get good value in the troughs that overproduction cycles cause in the stock price. Skyworks (and the whole semiconductor sector for that matter) is in such a trough right now, which makes this a compelling moment to accumulate shares, even after the surge that followed on the earnings release.
Before we go any deeper into the stock, let's have a look at the company itself. Skyworks Solutions designs, develops, manufactures and markets semiconductor products. Its product portfolio is diversified and includes amplifiers, antenna tuners, DC/DC converters, detectors, diodes, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, receivers, switches, synthesizers, technical ceramics and much more.
This diversification is already the first strength for Skyworks, although some may argue that Skyworks is not diversified at all since probably 35% of its sales are related to Apple's iPhone, which makes that Skyworks would have a hard time if the iPhone would slowly disappear. I don't see this happening any time soon, though. There will be ups and downs in the iPhone demand, as there have always been, but it will keep its dominant position in the Western world for years to come, in my opinion. In the meantime, Skyworks can continue to diversify away from Apple (AAPL).
And actually, Skyworks has already diversified. It develops products for aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and the wearables market. The company gives a nice overview on this illustration:
Skyworks: The stock
Like a lot of stocks especially in the technology sector, Skyworks has had a very volatile 2018. This is the stock's price evolution from January 1, 2018 to December 31, 2018:
So, while the stock started well in the first quarter of 2018, reaching almost $116, it collapsed in the second part of 2018. It trades at $81.22 at the moment of writing and has a 52-week low of $60.12.
And Skyworks' price has been volatile for a long time, as you can see from this 10-year graph:
Skyworks earnings history is more consistent that you would think of a company in a boom and burst sector such as semiconductors. This is the earnings per share history versus the stock price:
The guidance cut: very positive
Most followers of Skyworks will have noticed a big drop from the top, at the moment of writing 30% from its 52-week top, but then again also already 35% above its 52-week low.
This shows that the stock can be volatile. But the great thing for smaller investors is that you can use the volatility to accumulate shares over time. I have bought my first small batch at $70.30 and still am willing to buy more at these prices, but I will refrain myself if the stock goes much above $100 any time soon.
The reason that Skyworks' shares fell recently was two-fold. First, Skyworks has a big exposure to China. We all know by now that the economy is slowing down there. Of all the American stocks with Chinese exposure, Skyworks has the most, according to a Goldman Sachs survey:
The second reason was the general fall in Apple's suppliers after the Cupertino giant cut its guidance after a whole bunch of its suppliers had already done that before. We all know now that Apple's quarter was better than many had feared.
Skyworks had to cut its guidance too. The revenue guidance was revised to $970M from $1-1.02B. The EPS guidance was revised to $1.81-1.84 from $1.91. To put that in perspective: that is a revenue cut of less than 4% and an earnings cut of just 4.5%. This is a graph of Skyworks' market cap:
As you can see, the negative sentiment brought Skyworks' market cap down from $21B to less than $13B. A cut of more than $8B for a revenue revision of just $40M. That is an overreaction if I ever saw one, a prime example of why Benjamin Graham's character description of the manic-depressive Mr. Market still holds (although you are supposed to say 'bipolar' these days).
Skyworks' results were released last Tuesday (February 5) and the results were as announced with the guidance cut: revenue came in at $972M ($2M more than the revised guidance) and EPS at $1.83, at the higher end of the revised earnings guidance.
While the company guided lower for the next quarter (revenue of $800-820M versus a consensus of $851.49M and EPS at $1.43 versus a consensus of $1.51), investors felt relieved and the stock price shot up:
Skyworks as a dividend stock
In my article about the best dividend stocks, I explained that dividend doesn't make a stock outperform the market on its own. It is dividend growth in particular that makes dividend stocks outperform the broader index substantially. The top 20% of dividend growers outperform the S&P 500 by an average of 8.70%:
A 1% or 2% raise keeps up the dividend growth streak but will not let your stock beat the S&P 500 return over the long haul. I always strive for at least double-digit growth for years to come.
For Skyworks, this criterion may be less impressive than for TJX, since its dividend history is much shorter, but anyway, here are the numbers:
(Source: Seeking Alpha)
After a fast initial spike of the dividend, I think that the raises from now on will be more moderate, somewhere in the mid-to-high teens. But this is still an excellent rate and produces excellent results for the long term.
Skyworks: is it a safe investment?
A lot of investors are afraid of the semiconductor sector and shy away from stocks like Skyworks. The company is relatively small (a market cap of $14B), especially compared to giants like Intel (INTC) ($222B), Broadcom (AVGO) ($109B) or Texas Instruments (TXN) ($98B). Skyworks' earnings are also tied to its biggest client, Apple (AAPL), which makes some investors cautious as well.
But I think that Skyworks is an excellent investment, even for more conservative dividend growth investors. The stock price can be very volatile, but the earnings are not nearly as volatile, which makes Skyworks a safe investment fundamentally, with periods in which it is very interesting to add to your position. I am pretty sure Apple will not go out of business any time soon too, so that won't be a real problem for Skyworks. In the meantime, the company is diversifying away from its biggest customer.
Ready for new trends
Diversification will become easier with the spreading of the internet of things (IoT) and Artificial Intelligence (NYSE:AI) which will both be of the most important trends in the next decade.
Skyworks has recently acquired Avnera, a fabless semiconductor designer that is strong in chips for AI speakers and microphones, virtual assistants, wired or wireless headsets, smart gaming controllers and vehicle dashboard systems. Since voice is becoming more and more the preferred means of communication for AI and IoT, this is a smart acquisition, which sets Skyworks in a new market much related to its core market.
Besides that, Skyworks can also tap into that other much-lauded technology evolution: 5G. This is a quote from the company's website about 5G:
Even if there might be some hiccups in the growth of these three key developments in technology, I think few investors doubt that these trends will roll out over the next few years. Skyworks has positioned itself to profit from those trends.
Low payout ratio
What is also very important to check in dividend stocks is the payout ratio. It is the portion of the profit that is given to investors in the form of a dividend. If that ratio is too high, then consistently high dividend increases for the future are more in danger than with a low payout ratio. But Skyworks has an excellent (but short) track record of consistently low payout ratios:
As you can see, the company still only has a payout ratio of 26.5%, which means that it has plenty of room left for double-digit dividend raises for years to come. Don't forget that Skyworks has no debt at all, which means that even if there would be a temporary headwind, Skyworks would definitely remain a very safe dividend stock.
Skyworks pays a very respectable dividend of 1.86% at the moment of writing, but it also returns capital to stock owners via repurchases. This is what Liam K. Griffin, CEO and President of Skyworks had to say about this subject on the previous earnings call:
And perhaps most importantly, we returned over $1 billion to shareholders through share buybacks and dividends, representing a 55% growth in cash returns, as compared to the prior fiscal year. Notably, the Skyworks team delivered our 9th consecutive year of record revenue and EPS.
So, $1B has been paid to shareholders, which means about 80% of the profit. Maybe this could be alarmingly high for another company, but not for Skyworks, since it has no debt. This is a company that is excelling on all financial fronts. This was again reconfirmed on the last earnings call by Skyworks' CFO Kris Sennesael (emphasis mine):
We paid $67 million in dividends and repurchased a record high of 4 million shares of our common stock for a total of 284 million, and we ended the quarter with a cash balance of 1.1 billion and no debt.
As noted in our separate press release issued today, Skyworks Board of Directors has authorized a new $2 billion stock repurchase program. This new buyback plan reflects our confidence in Skyworks' business model and our ability to consistently produce strong free cash flow, allowing us to leverage share repurchases and dividends to generate higher shareholder returns. Our strong balance sheet and cash position provide important competitive advantages, allowing us to make the strategic investments in R&D while funding the capital requirements for 5G, as a complexity of our solutions intensifies.
This is the effect of the buybacks (excluding the effect of the record buybacks of the last quarter).
Over the last three years, Skyworks has bought back 8.5% of its shares, creating value for shareholders and boosting its EPS. The 4 million shares bought back in the last quarter amount to 2.25% but of course there were also shares issued as management compensation. The total number of shares was reduced, though, from 177.4 million at the end of September 2018 to 174.1 million at the end of December 2018, a reduction of another 1.9% in just one quarter. Great news for Skyworks' shareholders!
DGI investors typically are very price-conscious. That means the stock's valuation shouldn't be too high. And although Skyworks' stock price has gained significantly after the earnings release, it still looks undervalued:
(Source: FAST Graphs)
As you can see from this F.A.S.T. Graph, Skyworks is seriously undervalued. FAST Graphs uses a blended P/E (which is the average of the trailing twelve months P/E and the forward P/E) and it is just 11.5. The price (the black line is seriously under the blue line (the average P/E) and the orange line (the earnings growth).
The undervaluation still holds if you look at the more recent history of Skyworks:
Finviz estimates that the stock will grow 11.18% annually over the next 5 years, and because of the company's buybacks, I think this might even prove conservative. Add in a dividend of around 2% and you will have solid double-digit returns for years to come. If the P/E would return to more normal 15 (normal because that is the expected earnings growth), you could have returns in the high teens annually over the next few years.
If you invest for the long term, Skyworks may be one of the best dividend stocks there is. The company has a pristine balance sheet with no debt and more than $1B in cash. The company is determined to return a lot of money to its shareholders through buybacks and dividend. Skyworks has a volatile stock price, but over the long term, returns in the high teens are totally feasible.
I bought my first batch of shares just before the earnings, but even after the 10% jump in the stock price, it is still undervalued. Because of the volatile nature of the sector, there is a substantial possibility that Skyworks will have periods of undervaluation again in the future, which will provide investors with excellent opportunity to accumulate shares of this outstanding performer.
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In the meantime, keep growing!
Disclosure: I am/we are long SWKS, TJX, AAPL, AVGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.