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How ARM Holdings plc Will Deliver Its Dividend

I’m looking at some of your favourite FTSE 100 companies and examining how each will deliver their dividends.

Today, I’m putting tech titan ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) under the microscope.

Dividend history

ARM is a growth company — a blue-chip galloping elephant. Investors are willing to pay a sky-high earnings multiple for the shares: at a current price of 795p, over 50 times last year’s earnings compared with the FTSE 100 average of 12 times.

The corollary of the high earnings multiple is a low dividend yield: just 0.6% historic compared with the Footsie average of 3.7%.

ARM’s yield may be next to nothing, but what the company does have — as the table below shows — is a spectacular record of dividend growth.

  2005 2006 2007 2008 2009 2010 2011 2012
Dividend growth 20% 19% 100% 10% 10% 20% 20% 29%

The dividend has increased more than five-fold since 2005. Last year’s payout was covered 3.3 times by earnings compared with the FTSE 100 average of 2.2 times.

Dividend policy

The company website states: “ARM has a progressive dividend policy”. That’s it. No talk about dividend growth being linked to earnings, cash flows or inflation, or about a dividend-cover target. Who needs to talk about such things when annual dividend increases are running at between 10% and 100% a year!

Can ARM continue to deliver stupendous dividend growth? Well, in addition to the 2012 payout being covered 3.3 times by earnings, net cash on the balance sheet at the year end was £520m — or 10 times the year’s dividend. Hence, there is plenty of scope for ARM to continue to deliver strong dividend increases even if there were to be a blip in earnings growth.

It would take a serious and prolonged downturn in earnings to pose any kind of threat to the dividend. City analysts certainly aren’t expecting to see that in the forseeable future: they have pencilled in 25% dividend growth this year and 20% next year.

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> G A Chester does not own any shares mentioned in this article.