ARM Holdings (LSE: ARM) and Centrica (LSE: CNA) are two very different companies, but together they could help revolutionise your returns. On one hand, ARM is a fast growing tech darling with a healthy cash balance and monopoly over the smartphone microchip market, but the company’s dividend yield leaves much to be desired. On the other hand, Centrica is a utility that’s struggling to grow but provides an essential service for the UK as well as a healthy dividend yield for investors.
Some investors may shy away from ARM due to the company’s sky-high forward P/E of 37.1. Nonetheless, it’s easy to justify buying the shares even though they trade at a wide premium to the broader market. Indeed, City analysts expect ARM’s earnings per share to grow by 67% this year and a further 14% during 2016. When you factor in the company’s projected growth, ARM’s shares trade at a PEG ratio of 0.6. A PEG ratio of less than one signals that the shares offer growth a reasonable price. What’s more, ARM is one of the world’s leading microchip producers, and in an increasingly interconnected world, it’s unlikely that the demand for ARM’s products will evaporate any time soon. As a result, it looks as if ARM can keep its growth rate up for the foreseeable future.
Unfortunately, for income investors, ARM doesn’t offer much in the way of a dividend yield. The company’s dividend yield currently stands at 0.6%. However, ARM is flush with cash and with £904m of cash on its balance sheet City analysts expect ARM to jack up its cash returns to shareholders going forward. The company’s new CFO, Chris Kennedy, will be instrumental in this cash return as he previously worked at easyJet, where he oversaw a series of capital returns. If ARM returned just 50% or £450m of its cash pile to shareholders, investors could be in line for a special payout of 32p per share. Share repurchases could also be on the cards, which would help accelerate EPS growth.
While there’s the possibility that ARM could increase cash returns to investors going forward, Centrica’s shares already support a dividend yield of 5.4%. That said, Centrica did announce a dividend cut earlier this year, but many analysts were expecting the company to make such a move after Centrica’s misguided expansion into the oil & gas market. Now, City analysts are more upbeat about the sustainability of Centrica’s dividend payout over the long-term. Payout cover has increased by 30% since the beginning of the year, and according to City projections the new, lower payout is now covered one-and-a-half times by earnings per share, leaving plenty of room for manoeuvre. Also, Centrica is curtailing its exposure to the volatile oil & gas market while doubling down on its core utility business. Oil & gas production is a notoriously volatile and capital intensive business. Focusing on the more predictable customer-facing side of the business should put Centrica back on the path to long-term sustainable growth.
