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ARM Holdings plc’s Dividend Prospects For 2014 And Beyond

Many top FTSE 100 companies are currently offering dividends that knock spots off the interest you can get from cash or bonds.

In this festive series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.

Today, it’s the turn of technology giant ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US).

Dividends past

The table below shows ARM’s five-year earnings and dividend record.

  2008 2009 2010 2011 2012
Statutory earnings per share (EPS) (diluted) 3.39p 3.11p 6.36p 8.19p 11.51p
Normalised EPS (diluted) 5.66p 5.45p 9.34p 12.45p 14.70p
Dividend per share 2.20p 2.42p 2.90p 3.48p 4.50p
Dividend growth 10.0% 10.0% 19.8% 20.0% 29.3%

As you can see, ARM delivered super-strong dividend growth through the last five years, and the rate of growth accelerated year on year. The average annual increase works out at a hugely impressive 17.8% — light years ahead of inflation.

The total dividend payout of 15.5p a share over the period was handsomely covered 3.1 times by ‘normalised’ (underlying) EPS, and a still-robust 2.1 times by warts-and-all statutory EPS.

A superb dividend-growth performance through difficult economic times for most companies.

Dividends present

ARM has paid a half-time dividend of 2.1p so far this year. Analyst consensus forecasts suggest a final dividend of 3.4p when the company announces its annual results on 4 February — giving a 2013 full-year payout of 5.5p (up 22.2% on 2012).

Underlying EPS is expected to come in at 20.6, which would raise dividend cover to 3.7.

At a share price of 1,010p, ARM’s current-year dividend represents a yield of just 0.5%.

Dividends yet to come

Analysts see another bumper dividend increase for 2014, with the payout rising 27.3% to 7p. Meanwhile, earnings are forecast to rise 22% to around 25p, covering the dividend 3.6 times.

ARM’s yield may be low, but there is scope for the board to increase the dividend payout ratio (by reducing cover) in the future. Not only that, but there’s further potential for increased cash returns to shareholders down the line, because the company has an ever-increasing cash pile. At the latest reckoning, net cash was £670m, equivalent to 48p a share; or around seven times the 7p forecast dividend for 2014.

One of the lowest yielding but fastest rising dividends in the market. This is a growth stock, so unattractive for investors seeking an immediate high income.

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