2 Numbers That Could Make ARM Holdings plc A Terrific Buy

Today I am looking at why ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) may be a lucrative investment destination.ARM Holdings

Here are two numbers that I think help make the case.


At first glance ARM Holdings may not be the most attractive dividend candidate on the market. Payout yields have long lagged the market, and City analysts expect yields to remain under par during the medium term at least — estimated dividends for this year and next carry yields of just 0.8% and 0.9% for 2014 and 2015 correspondingly.

By comparison the FTSE 100 sports a forward average of 3.5%, while ARM Holdings also significantly drags behind its industry peers — the entire technology hardware and equipment sector sinks the company with a 2.2% prospective average.

However, investors should not lose sight of ARM Holdings’ ambition to consistently deliver chunky payout growth. The business lifted the interim payout 20% to 2.1p per share, and current forecasts point to similar growth for the foreseeable future.

Indeed, the tech play is anticipated to lift the full-year dividend 18% in 2014 to 6.7p. And an additional 22% advance is pencilled in for next year, to 8.2p.

These figures are underpinned by anticipated earnings rises of 12% and 23% for 2014 and 2015 correspondingly, in turn creating solid dividend coverage of 3.5 times predicted earnings for these years. And with many expecting the bottom line to continue surging well into the future, investors could continue to enjoy rocketing dividend expansion for some time.

39.3 million

Investors should of course be aware of the threat to ARM Holdings’ growth prospects from a changing smartphone market, however. Firstly, consumer demand for cheaper devices keeps on galloping higher, a poor omen for the company’s royalties outlook as such products obviously command lower revenues.

And this month Samsung — the world’s largest manufacturer of mobile phones — sounded the klaxon by issuing another profit warning, advising that the global market for smartphones continues to decline. Although ARM Holdings advised in today’s update that “market data [underpins] the short-term outlook for royalty revenues,” concerns continue to rattle around for the coming years.

Still, the runaway success of Apple’s iPhone 6 and iPhone 6 Plus products in mid-September suggests that demand for royalty-driving, high-end smartphones should remain a happy hunting ground for critical component builders such as ARM Holdings.

Apple advised this week that it had sold a record 39.3 million iPhones during July-September, up 12% from the corresponding 2013 period and underpinned by the launch of its new product. And the California firm is reportedly struggling to match demand for its shiny new range, a promising omen for Apple’s chip suppliers.

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