1 Reason I’d Buy ARM Holdings plc Today

Today I am looking at why ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) could be considered a canny income selection.

Annual dividend growth turning heads

At face value, microchip giant ARM Holdings may not be the most attractive option for those seeking access to red-hot dividend flows. Indeed, the vast sums of capital required to develop the next generation of industry-leading components means that the business has long lagged the rest of the UK’s stock market heavyweights in terms of dividend yields.

appleHowever, the Cambridge-based business has been able to deliver stonking payout rises in recent times, in line with solid earnings growth and gargantuan cash flows. And its full-year payouts have risen at a compound annual growth rate of 23.9% since 2009.

With ARM Holdings anticipated to punch further heady earnings growth, of 11% and 23% in 2014 and 2015 correspondingly, City analysts expect the business to keep dividends steaming higher — the full-year payment is predicted to advance 18% this year to 6.7p per share, and an additional 22% rise is pencilled in for 2015.

The company lifted the interim dividend by a fifth to 2.52p last month, a decision helped by a solid upswing in its capital pile — net cash stood at £746.4m as of the end June compared with £706.3m at the close of 2013.

Lucrative long term

Dividend projections for 2014 and 2015 generate yields of just 0.8% and 0.9% correspondingly, falling well short of a FTSE 100 forward average of 3.3% as well as a corresponding readout of 2.2% for the complete technology hardware and equipment sector.

But with the number crunchers suggesting that earnings should continue to surge higher well beyond next year, ARM Holdings could well prove to be a lucrative long-term dividend play.

I have previously voiced my concerns over the effect of market saturation across traditional Western markets in both the smartphone and tablet PC sectors, as well as the charge being made by rival chip manufacturers like Intel in these arenas, on ARM Holdings’ earnings potential in coming years.

A shrewd pick

Still, bubbly emerging market phone and tablet demand offers terrific opportunity for the world’s major chipbuilders — Chinese tech giant Lenovo announced just this week that smartphone sales to South-East Asia quadrupled during April-June, while shipments to Eastern Europe rose sixfold.

On top of this, ARM Holdings is also spanning out into the networking and servers sectors, a decision which has helped to keep licence agreements ticking solidly higher in recent times. Although a multitude of headwinds remain for its key mobile device operations, ARM Holdings could represent a shrewd stock pick for those seeking bumper earnings and dividend expansion.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.