Is ARM Holdings plc A Super Income Stock?

ARM HoldingsIt’s been a rather disappointing year so far for one of the UK’s biggest technology companies, ARM (LSE: ARM) (NASDAQ: ARMH.US). That’s because shares in the Cambridge-based company have fallen by over 18% since the start of the year, which is well behind the 1% gain made by the FTSE 100 over the same time period.

However, now that shares are more keenly priced and ARM is a far more mature company than it was several years ago, could it be of interest to income-seeking investors? In other words, is ARM a super income stock?

A Low, Low Yield

Although shares have fallen considerably over the last six months or so, shares in ARM still yield just 0.76%. Despite inflation falling to 1.5% in May and high street savings accounts offering less than 2%, a yield of 0.76% is still very low. Indeed, it is less than a quarter of the FTSE 100’s yield of 3.4% and shows that investors in ARM are going to be unable to live comfortably off their dividends.

With such a low yield, even a very strong dividend per share growth rate is unlikely to do much to improve things in the short to medium term. So, while dividends at ARM are forecast to increase by 24% over the next year alone, this would still put the company on a yield of just under 1% at current prices – still well below what would be considered attractive for yield-hunting investors.

The Scope To Increase Dividends

As mentioned, ARM is now a far more mature company than it was a few years ago and one aspect of this status is a declining growth rate in profitability. OF course, that’s not to say that ARM will no longer deliver very impressive bottom-line growth, but it is unlikely to continue at historic rates in perpetuity. One feature of a declining growth in profitability is the scope to increase dividends per share due to internal growth opportunities becoming less abundant, thereby meaning more cash can be paid to shareholders.

On this front, ARM has a lot of potential because its dividend payout ratio (the proportion of profits paid out as a dividend) is expected to be just 28% this year. Indeed, ARM appears to have the scope to increase dividends per share at a very fast rate and, when combined with continued strength in its bottom-line growth rate, could put ARM into income-seekers’ territory over the medium term.

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Peter does not own shares in ARM. The Motley Fool has recommended shares in ARM Holdings.