Why ARM Holdings plc Should Not Be In Your 2014 ISA

appleARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) has rewarded shareholders with a staggering ten-bagger over the past five years — the price has soared from just 95p to £9.85 in that time.

And compared to that, the FTSE 100 looks like the kind of line you don’t want to see on a heart monitor!

An obvious candidate, then, for some of your 2014-15 ISA allowance of £11,760, or for what’s left of your 2013-14 tax-free investments?

I actually think not, but before I explain why, let’s take a quick look at ARM’s recent record and current forecasts:

Dec EPS Change P/E Dividend Change Yield Cover
2009 5.45p -4% 32.6 2.42p 1.4% 2.3x
2010 9.34p +71% 45.3 2.90p +20% 0.7% 3.2x
2011 12.72p +36% 46.5 3.48p +20% 0.6% 3.7x
2012 14.96p +18% 51.3 4.50p +29% 0.6% 3.3x
2013 20.88p +40% 52.6 5.70p +27% 0.5% 3.7x
2014* 24.18p +16% 40.1 6.73p +18% 0.7% 3.6x
2015* 30.11p +24% 32.2 8.27p +23% 0.9% 3.6x

* forecast

As an aside, when they look at those low dividend yields a lot of people don’t realise that ARM is actually lifting its dividend very handsomely each year and is, in fact, paying out close to a third of its earnings — not bad for what is usually seen as a pure growth share.

ARM chips everywhere

Those forecasts look pretty confident, too — in final results released earlier this month, ARM told us that growth in licenses and royalty revenue was continuing to climb nicely. The firm agreed 26 new processor licenses and saw 2.9 billion chips shipped — in the fourth quarter alone! That was a 16% year-on-year rise in processor shipments, with ARM seeing faster growth in the low-cost entry-level market.

So we’re pretty certain to see earnings (and dividend) growth from ARM for a few years yet, and I really don’t think that forward P/E of 40 is too high.

The future

But I reckon an ISA the ideal vehicle for the ultimate long-term-buy-and-forget strategy, and the kind of shares I’d go for are shares that I’d expect to still be doing well in another 20 or 30 years.

And ARM is, well, technology.

Back in 1994, chips were made by Intel (whose Pentium couldn’t do arithmetic properly) and AMD, Zip drives were hot stuff, Yahoo! was founded as the internet reach a majestic 25 million users — and mobile computing was still the stuff of dreams.

Things are going to be very different in 2034, and ARM is very much not a “long-term-buy-and-forget” share.

Long term

I’m not saying don’t buy ARM shares — in fact, I think you would still do well for a few years yet if you did so. But I think an ISA is best for those very-long-term boring investments that have a habit of turning into very nice retirement pots.

ARM Holdings might not fit in with my ISA criteria, but it has helped a good few people on their way to millionaire status. The Motley Fool report Ten Steps To Making A Million In The Market can help you do the same -- you might be surprised to learn that the steps are really not complicated. The report is free, so it will cost you nothing to check it out.

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> Alan does not own any shares in ARM Holdings.