Does ARM Holdings plc Pass My Triple Yield Test?

Finding affordable stocks is getting difficult in today’s buoyant market. Does ARM Holdings plc (LON:ARM) fit the bill?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Like most private investors, I drip-feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE 100 is up 68% on its March 2009 low, and the wider market is no longer cheap — it’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US), to see if it might fit the bill.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

The triple yield test

Today’s low cash saving and government bond rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my income portfolio, I like to look at three key trailing yield figures — the dividend, earnings and free cash flow yields. I call this my triple yield test:

ARM Holdings Value
Current share price 865p
Dividend yield 0.7%
Earnings yield 2.4%
Free cash flow yield 2.1%
FTSE 100 average dividend yield 3.0%
FTSE 100 earnings yield 6.0%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.7%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. ARM’s earnings yield of 2.4% reflects its P/E rating of 41 — despite the 21% fall in the firm’s share price so far this year, it is still a very expensive stock.

As you’d expect from such a highly rated stock, ARM’s dividend yield is negligible, although its free cash flow yield of 2.1% (including money placed on deposit) suggests that the firm could afford much larger dividend payouts, especially as it has no debt, and net cash and short-term deposits of £587m.

Is ARM a buy?

In my view, ARM fails my triple yield test, as although its dividend is generously covered by free cash flow, the firm’s dividend and earnings yields are far too low to be of interest to me.

Although growth investors might say that ARM offers the potential for big capital gains, I think that this ship has already sailed; ARM’s share price fell by 6% yesterday, despite the firm reporting a 32% increase in pre-tax profits. This kind of behaviour is a classic symptom of a stock that is going ex-growth, and entering a period of re-rating and consolidation.

I reckon ARM’s share price will continue to drift lower for some time, as investors adjust to the idea that a £13bn company with pre-tax profits of just £364m might already have reached its optimum size.

This AI stock is attracting investors like Michael Bloomberg and Peter Thiel…

Why are these legendary investors, already wealthy beyond imagination, drawn to this opportunity? The allure lies in more than just potential returns; it's a vote of confidence in a company poised for long-term success.

Imagine a revolutionary AI company that's not just participating in the digital media landscape but reshaping it entirely.

Trusted by giants like Amazon, Disney, and Netflix, the company reported nearly £637 million in revenue last year, marking a robust 7.8% growth over three years. Its impressive market reach and spirit of innovation are just the beginning of its story.

Best of all, we’re thrilled to offer you an exclusive glimpse into this game-changing AI investment, absolutely free.

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland does not own shares in ARM Holdings.

More on Investing Articles

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Down 65% from its highs, this FTSE 250 stock is one to consider buying low

Shares in a strong FTSE 250 company going through a cyclical downturn have caught Stephen Wright’s attention as a potential…

Read more »

Investing Articles

£20,000 invested in a Stocks and Shares ISA 5 years ago is now worth…

Stocks and Shares ISA investors have reaped enormous returns since the pandemic, but how much money have they actually made?…

Read more »

Investing Articles

Investing £100 a month for 10 years could generate a second income of…

Even small investors can unlock a large second income from the stock market. Zaven Boyrazian demonstrates how much wealth just…

Read more »

Investing Articles

Are these the best US stocks to consider buying right now?

Some of the best stocks to buy could be those falling the most. Zaven Boyrazian explores the worst-performing US shares…

Read more »