How Strong Are ARM Holdings plc’s Dividends?

ARM HoldingsDoes ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) even pay dividends?

The designer of the chips that power a generation of mobile computing devices might look like a pure growth investment, but it has actually been paying out cash, too — and it’s growing nicely.

20% a year!

In fact, over the past four years we’ve seen dividend rises of 20%, 20%, 29% and 27%, and for the years ending December 2014 and 2015 we have further rises of 20% and 25% being predicted — and at growth rates like that, it won’t be long before ARM becomes the best dividend payer on the planet!

Sure, with a rapidly-growing share price those payouts have been yielding less than 1% — just 0.5% last year. And those handsome annual rises will inevitably slow down as the yield gets close to the FTSE 100’s average of around 3%.

But it helps assuage one of my biggest fears when I look at a growth story — what’s going to happen when it inevitably turns ex-growth. I’m quite certain that the growth in sales of ARM’s chip designs will eventually slow as the markets for such things become more mature, though I don’t expect it to happen any time soon.


But when it does happen, and a stellar growth stock puts in a set of results that do not exceed the punters’ wildest expectations, we see masses of them running for the exits — and a share price crash.

What such a company needs to be doing is planning its transition to a mature dividend-payer well in advance of the actual event, and that’s exactly what I see ARM doing right now.

At results time for 2013, the company said “As well as continuing to grow the dividend, the Board intends to undertake a limited share buyback programme to maintain a flat share count over time“, so there’s clearly some momentum behind redistributing cash to shareholders.

Looking more closely at 2013’s figures, while the dividend only yields 0.5%, the shares were on a pretty serious P/E multiple of 53! If we imagine ARM as a mature blue-chip on a P/E close to the FTSE’s long-term average of 14, that would translate to an affective dividend yield of 1.9% — still some way behind the 3% index average, but really not bad at all at this stage.

Future cash

With the share price stagnating of late, standing at 884p today, the prospective P/E falls to 37 for this year and 30 for next, which is by no means outrageous for a company with ARM’s growth potential.

And those strongly-rising dividends paint ARM as one of tomorrow’s solid income investments.

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