A Practical Analysis Of ARM Holdings Plc’s Dividend

Is ARM Holdings plc (LON: ARM) in good shape to deliver decent dividends?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The ability to calculate the reliability of dividends is absolutely crucial for investors, not only for evaluating the income generated from your portfolio, but also to avoid a share-price collapse from stocks where payouts are slashed.

There are a variety of ways to judge future dividends, and today I am looking at ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) to see whether the firm looks a safe bet to produce dependable payouts.

Forward dividend cover

Forward dividend cover is one of the most simple ways to evaluate future payouts, as the ratio reveals how many times the projected dividend per share is covered by earnings per share. It can be calculated using the following formula:

Forward earnings per share ÷ forward dividend per share

ARM Holdings is expected to carry a dividend of 5.6p per share in 2013, according to City estimates, with earnings per share forecast to come in at 20.8p. This results in dividend cover of 3.7 times, well above the generally-considered safety benchmark of 2 times prospective earnings.

Free cash flow

Free cash flow is essentially how much cash has been generated after all costs and can often differ from reported profits. Theoretically, a company generating shedloads of cash is in a better position to reward stakeholders with plump dividends. The figure can be calculated by the following calculation:

Operating profit + depreciation & amortisation – tax – capital expenditure – working capital increase

ARM Holdings’ free cash flow registered at £119.2m in 2012, down substantially from £190.4m in 2011. Although operating profit climbed to £263m in the period from £222m in the prior 12 months, a massive movement in working capital of £80.7m saw cash flow deteriorate. The company was also affected by higher tax and capex costs last year.

Financial gearing

This ratio is used to gauge the level debt a company carries. Simply put, the higher the amount, the more difficult it may be to generate lucrative dividends for shareholders. It can be calculated using the following calculation:

Short- and long-term debts + pension liabilities – cash & cash equivalents

___________________________________________________________            x 100

                                      Shareholder funds

ARM Holdings is a fantastic cash generator, and the balance sheet is not encumbered by debts or pension liabilities. This results in a negative net gearing ratio of 43.6% last year, versus 22.2% in 2011. Last year ARM Holdings produced net cash of £267.3m in 2012 against £203.8m in the prior 12 months.

Buybacks and other spare cash

Here, I’m looking at the amount of cash recently spent on share buybacks, repayments of debt and other activities that suggest the company may in future have more cash to spend on dividends.

ARM Holdings does not engage in share repurchasing, nor does it have piles of debt which it needs to pay down. Instead, excess capital is used for research and development purposes to create the next generation of semiconductors.

A secure yet uninspiring dividend play

As the metrics above show, ARM Holdings is in solid financial shape, providing shareholders with excellent peace of mind for future dividend expansion. But for income investors the company continues to offer slim pickings.

Brokers expect the business to yield just 0.7% this year, well short of the FTSE 100 average of 3.3%. So although the company has steadily increased the payout in recent years — it raised the full-year payout almost 30% in 2012 — better income prospects can still be seen elsewhere.

Electrify your dividend income with the Fool

So although ARM Holdings fails the grade as a decent dividend stock, I recommend you take a look at this exclusive, in-depth report which gives the lowdown on a fantastic FTSE 100 high-income opportunity to really propel the income from your stock portfolio.

The blue chip in question offers a prospective dividend yield comfortably north of 5%, and has been declared “The Motley Fool’s Top Income Stock For 2013“! Click here to download the report now — it’s absolutely free and comes with no further obligation.

> Royston does not own shares in ARM Holdings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Environmental technology concept.
Investing Articles

This FTSE 250 investment trust’s yielding close to 13%! But can it last?

Our writer takes a look at a FTSE 250 stock that’s currently yielding nearly 13%. And he considers what this…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

The Entain share price jumps 14% on an upbeat report – time to consider buying?

The Entain share price is outstripping every stock on the FTSE 100 today following a positive market update. Maybe it's…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Is this bargain-priced growth stock the best share for me to buy after today’s bullish update?

This former penny stock's had a brilliant run and Harvey Jones has reaped the rewards. But does he still think…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Under £14 now, Persimmon’s share price is trading at less than half its fair value by my reckoning

Persimmon’s share price fell a lot over the past year, but I think a new home-building initiative and improved macroeconomic…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Is this FTSE 100 pharma gem now a brilliant bargain?

This FTSE 100 pharmaceutical giant has been hit by fears of US tariffs and litigation over a key product, but…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Is Warren Buffett losing his touch?

Our writer's noticed that Warren Buffett’s investment vehicle has underperformed the S&P 500 during three of the past four years.…

Read more »

Investing Articles

Non-energy minerals are the top performers in 2025. These small-cap FTSE shares are leading the charge

Mark Hartley examines which sectors are doing well in 2025 and the FTSE shares that investors should consider to benefit…

Read more »

Emma Raducanu for Vodafone billboard animation at Piccadilly Circus, London
Investing Articles

Buying 10,000 Vodafone shares generates a passive income of…

Vodafone shares have had a rough ride, with dividends slashed in half. But with its turnaround making steady progress, is…

Read more »