ARM Holdings (LSE: ARM)andCentrica (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 companys dividend yield leaves much to be desired. On the other hand, Centrica is a utility thats struggling to grow but provides an essentialservice for the UK as well as a healthy dividend yield for investors.
Some investors may shy away from ARM due to the companys sky-highforward P/E of 37.1. Nonetheless, its easy to justify buying the shares even though they trade at a wide premium to the broader market. Indeed, City analysts expect ARMsearnings per share to grow by 67% this year and a further 14% during 2016. When you factor in the companys projected growth, ARMs shares trade at a PEG ratio of 0.6. A PEG ratio oflessthan one signals that the shares offer growth a reasonable price. Whats more, ARM is one of the worlds leading microchip producers, and in an increasinglyinterconnected world, its unlikely that the demand for ARMs 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 doesnt offer much in the way of a dividend yield. The companys 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 companys 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 accelerateEPS growth.
While theres the possibility that ARM could increase cash returns to investors going forward, Centricas 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 Centricas misguided expansion into the oil & gas market. Now, City analysts are more upbeat about the sustainability of Centricas 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.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings and Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.