A Closer Look At ARM Holdings Plc's Dividend Potential
Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.
I am currently looking at the dividend prospects of ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) and assessing whether the company is an appetising pick for income investors.
How does ARM Holdings' dividend history stack up?
2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|
FY Dividend Per Share | 2.42p | 2.9p | 3.48p | 4.5p |
DPS Growth | 10.00% | 19.80% | 20.00% | 29.30% |
Dividend Cover | 2.3x | 3.2x | 3.6x | 3.3x |
Source: ARM Holdings Company Accounts
ARM Holdings has a very decent record of growing the dividend in recent years, even posting double-digit expansion in 2009 despite a slight dip in earnings. The company has been able to turbocharge the payout since then as earnings have exploded, with last year's growth almost treble that of 2009.
Dividend cover has remained substantially in excess of the generally regarded benchmark of 2 times forward earnings, mainly due to the company allocating substantial amounts of capital into R&D to boost its product pipeline and ensure excellent earnings growth prospects.
What are ARM Holdings' dividends expected to do?
2013 | 2014 | |
|---|---|---|
FY Dividend Per Share | 5.6p | 6.6p |
DPS Growth | 24.40% | 17.90% |
Dividend Cover | 3.7x | 3.8x |
Dividend Yield | 0.50% | 0.60% |
Source: Digital Look
ARM Holdings announced in last month's interims that revenues leapt 28% in January-March to £170.3m, pushing pre-tax profit an impressive 44% higher from the corresponding 2012 period to £89.4m. The company generates turnover from designing and licensing IP for semiconductors, and solid demand for its next-gen smartphone and tablet PC technology helped to drive performance.
Brokers expect earnings to rise 36% this year and 24% in 2014, helping to underpin meaty dividend growth, even if consensus expects the growth in shareholder payouts to moderate from last year.
Additionally, the firm is an excellent cash generator, which should also underpin its ultra-progressive dividend policy. Net cash stood at more than £520m as at the end of December 2012 versus around £478m three months earlier.
How do ARM Holdings' dividend prospects rate against the competition?
Prospective Dividend Yield | Prospective P/E Ratio | |
|---|---|---|
Technology Hardware & Equipment | 2.40% | 22.5 |
FTSE 100 | 3.20% | 15.5 |
Source: Digital Look
ARM Holdings currently changes hands on a P/E rating of 52.4 for 2013, steaming ahead of the valuation of its sector peers despite a far-less lucrative dividend yield. It also lags its fellow FTSE 100 constituents in both respects, and the firm's low yields makes it an unattractive income pick in my opinion.
Broadly speaking, although I am tipping earnings to keep heading substantially higher, I believe that ARM Holdings is severely overpriced at current levels. The company's exceptional track record of innovation, coupled with ability to gain market share, has pushed the share prices relentlessly skywards.
But fears over waning semiconductor demand and rising competition from the likes of industry giant Intel -- whose growing stable of customers includes Lenovo and Motorola -- leaves ARM Holdings at jeopardy of a heavy share price correction.
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