We’ve just had interim results from chip designer ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), and they reinforce my liking for the company.
ARM has been a towering growth success over the past decade, and the share price has echoed that — it’s up around 700% over the 10 years to 874p, compared to which the FTSE looks to have flatlined.
But after such a rise, are the shares still worth buying? Oh yes. Here are three reasons why I think so:
1. ARM is cheap
Yes, a growth stock on a P/E of 35 based on forecasts is cheap! ARM shares finished 2013 on a a P/E of nearly 53, and it hasn’t been as low as today’s forward multiple since 2009 — and that was in the depths of the stock market crash.
Earnings per share (EPS) growth has been cracking along, and there’s a further 13% forecast for this year and 24% next. And I really can’t see that slowing down much.
2. Smartphones
The growth in smartphones, tablets and other mobile devices has been phenomenal — but it’s still barely started. ARM is already the chip-designer of choice for most of the top makers, including Apple for its iPhones and iPads, and that doesn’t look likely to change any time soon. ARM saw 5.6 billion of its chips shipped in the first half.
But it’s more than that, and ARM is already ahead of the game. The company’s inroads into enterprise networking are impressive, and it is already well on the way to a leading position in the Internet of things market — that’s where almost everything we carry will have a processor chip in it and be connected to the net.
3. Dividends
What, I’m impressed by the measly 0.5% dividend yield provided in 2013? I am, yes.
You see, ARM has been steadily increasing its annual payouts at way above inflationary rates. Last year’s dividend was 27% ahead of 2012’s, and there are rises of 20% and 25% forecast for the next two years. That would only take the yield to 1% by 2015, but the actual cash would be the equivalent of a 2.5% yield for a company on an average P/E of 14.
What that says to me is that ARM is already laying the foundations for becoming a serious dividend-paying company, and that its eventual transition from growth to maturity should be relatively painless.
