What Dividend Hunters Need To Know About ARM Holdings plc

Today I am looking at whether ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) is an appealing pick for those seeking chunky dividend income.

A terrific dividend growth pedigree

With demand for smartphones and tablet PCs exploding in recent years, ARM Holdings has seen earnings gallop steadily skywards. Earnings have risen at a compound annual growth rate of 22.3% during the past four years, a situation which has seen it emerge as an impressive cash generator — net cash surged to £706.3m last year from £520.2m during 2012.

These ample capital flows have enabled the chipbuilder to increase the full-year dividend at an eye-watering rate, and last year’s applepayment leapt by an impressive 27% to 5.7p per share.

And City analysts expect the firm to continue recording chunky earnings growth in coming years, with rises of 13% and 24% pencilled in for 2014 and 2015 respectively, a terrific omen for future dividends — forecasters are anticipating a 21% payout rise this year alone, to 6.9p per share, with an extra 23% increase predicted for next year to 8.5p.

… but yields significantly trail the market

These growth rates are undoubtedly impressive, but income investors should be aware that yields are expected to remain at relatively-meagre levels well into the future. Indeed, prospective dividends for 2014 and 2015 manufacture low readouts of just 0.7% and 0.9%, well below the FTSE 100 average of 3.2%.

Instead, ARM Holdings, as one would expect from one occupying the fast-moving technology hardware and equipment sector, is required to devote the vast majority of its capital pile to maintain its place at the coalface of technological innovation. The business forked out almost £250m on a variety of investing activities in 2013, comparing starkly with just £68.9m shelled out in dividend payments.

On top of this, I believe that both growth and income investors should take serious notice of the impact of slowing demand for mobile devices — combined with increasing consumer appetite for cheaper smartphone models — on ARM Holdings’ future revenues.

The company is looking to branch into new areas such as networking and servers to mitigate this effect, but with activity here at the fledgling stage and competition intensifying across all its markets, earnings projections for coming years could be in line for a shock.

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Royston does not own shares in ARM Holdings.