ARM Holdings' Dividend Dissension

Recent developments have brought upheaval for U.K. chip designer ARM Holdings (NASDAQ:ARMHY), with shares shedding 8% since Tuesday's earnings announcement. Dwindling profits for fiscal 2003 caused concern, but what sent some folks running for the hills was management's announcement of a dividend.

Beginning with the bad earnings news, full-year revenues dropped 15% to $229 million, while net profits took a 35% nosedive to $35.7 million. But things looked better for the fourth quarter, as revenues increased 5% over the same period in 2002, and adjusted net income edged up 11% to $6.7 million.

Now, on to the dividend flap. On this side of the pond, after years of being seen as old-fashioned, dividends are finally getting some respect. But from a company that lives under the "growth" tag, a dividend can damage its street credibility. That appears to be the assessment of many shareholders, as well as one of our Foolish colleagues in the U.K., who think the dividend announcement means that ARM Holdings has jumped the shark. But are the company's best days really behind it?

Management has given the thumbs up to analyst forecasts of 20% sales growth for 2004, and with 128 partners licensing its technology -- including well-known tech leaders Intel (NASDAQ:INTC), Motorola (NYSE:MOT), and Nokia (NYSE:NOK) -- ARM's intellectual property resides inside just about everything we use today, from PDAs to cell phones to washing machines. Moreover, the business operates with enviable gross margins (above 90%) and sits on a large and growing pile of cash. There's long-term value here, but at 78 times 2004 estimates, the stock is no longer a no-brainer.

The real ARM experts are in the Fool's ARM Holdings and New Paradigm Investing discussion boards.

Seth Jayson can be reached at [email protected].