ARM Holdings PLC And Tesco PLC Are Turning Growth And Income Investing Upside Down!

Is Tesco PLC (LON: TSCO) actually the growth star and ARM Holdings PLC (LON: ARM) the cash provider?

| More on:

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.

Look back just a few short years and the difference between FTSE 100 blue-chip income-generating companies and low-dividend-growth candidates was as clear as day.

At this time back in 2014, Tesco (LSE: TSCO) was just about to announce a tasty dividend yield of 4.4%. Granted it had been unchanged for three years, but it seemed well covered — and even though earnings per share (EPS) had fallen for two years in a row, we really weren’t prepared for the carnage still to come.

A couple of months prior to that, ARM Holdings (LSE: ARM) had coughed up a mere 0.5% dividend, and that only got as high as 0.8% by December 2015. As for ARM’s EPS growth, we’ve since seen a very nice 23% followed by 32% in 2014 and 2015, respectively.

Turnaround

But if we look at the situation today, ARM is the company that has been raising its dividend faster, and Tesco is the one with the greater EPS growth on the cards. In fact, ARM’s dividend is being boosted way ahead of inflation. Its 2015 dividend payment was a full 25% ahead of 2014’s, which in turn came in 23% ahead of the 2013 payment — and forecasts suggest a further 14% lift this year.

Tesco’s dividend, meanwhile, was slashed to a mere 0.5% by February 2015 and is expected to yield a smaller 0.1% for the year just ended in February 2016.

Looking at EPS growth, while Tesco’s is expected to have slumped by 50% in the year just gone, the City’s analysts have a storming return to 80% growth predicted for the year to February 2017, with a further 33% pencilled-in for the following year. What’s more, these expectations would put Tesco shares on a PEG ratio of a tiny 0.3 this year, followed by 0.5 next — and anything under 0.7 is usually seen as a strong growth indicator.

ARM, meanwhile, is expected to turn in a 43% EPS rise in the current year, which is still excellent even if only little more than half Tesco’s growth prediction. But that would slow to 13% on 2017 estimates.

So on current showing, ARM is the dividend-acceleration powerhouse while Tesco is looking like the growth star!

Normality restored?

Of course, this is really just a short-term reversal caused by Tesco’s unprecedented slump. The slump came after the UK’s biggest groceries retailer completely failed to see the intense price competition and recession-led belt tightening that has sent shoppers in their hordes to the ascendant Lidl and Aldi.

So what we’re seeing should hopefully be a relatively short-term recovery situation, with Tesco dividends expected to yield around 2.2% by February 2018 — though for me, a P/E of almost 17 still seems very poor value.

But the thought worth pausing for is that ARM is well on its way to turning into a solid dividend payer. Sure, the 2017 payment is expected to yield only 1.2%, but that’s down to the huge share price growth that has accompanied ARM’s superb dividend progress.

Enormous yield

And get this — if you’d bought ARM shares at the end of 2008, not only would you have enjoyed an 11-bagger on the share price, but you could also be looking forward to an effective 2017 dividend yield of a massive 13% on your original 90p share price!

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.

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

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »