Usually technology companies don't pay high-dividend yields, as the need to invest in future growth makes management's reluctant to distribute cash to shareholders. Therefore, these companies generally have strong balance sheets but below-average dividend yields. Garmin (GRMN) is one exception, offering both a safe and high-dividend yield of about 4.6%. Moreover, contrary to many dividend stocks the company is trading at relatively low valuation multiples at only 15x its forward earnings, making it a compelling income investment based on attractive yield and valuation.
Garmin offers global positioning systems [GPS] devices, being a global leader in GPS technology. The company was founded in 1989 with a goal to be a leading supplier of navigation devices globally. Currently, Garmin is the leading provider of global positioning satellite navigation systems used in a variety of products, that are accessed through a network of global positioning system satellites. The company is a publicly traded company since 2000 on the Nasdaq, and has a market capitalization of $7.6 billion. The company operates in five segments: Automobile/Mobile; Outdoor; Fitness; Marine; and Aviation.
As shown in the previous graphic, Auto/Mobile is the largest segment representing more than half of Garmin's sales but only 36% of its operating income. The company remains the worldwide personal navigation device [PND] leader, experiencing market share gains globally, despite a slowing industry. The PND industry has been in decline since 2008 with the trend expected to continue in 2013. Garmin has a global market share above 40%, and Swedish market research firm Berg Insight estimates that the three vendors Garmin, TomTom (OTC:TMOAY) and MiTAC hold together 73% market share worldwide. It also estimated that 28 million PNDs were sold worldwide in 2012 against 33 million the previous year, a 15 percent decline. Furthermore, the firm forecasts that this market will decline to about 17 million units in 2017. The market for automobile and PNDs has declined because of the free mapping functions in smartphones and factory-installed vehicle systems.
In 2012, Garmin achieved $2.7 billion in revenues, a decrease of 1.6% from the previous year. The Auto/Mobile segment was the major reason for the drop, given that its revenues declined 6% to $1.49 billion. In its remaining segments, the company achieved good growth rates with the exception of Marine. The non-PND market is growing, and should continue its rise in 2013 with the company expecting revenues to grow between 5% and 10%. The company's profitability is very good, taking into account that Garmin's net income was $542 million in the past year, or a 20% profit margin. Its earnings-per-share increased 3.4% to $2.76 due to Garmin's smaller segments enjoying higher profitability than Auto/Mobile, more than offsetting the decline in revenues at the group level.
In the first six months of 2013, Garmin had almost $1.3 billion in revenues representing a 4% decline from the same period in 2012. Traditional segments of outdoor, fitness, aviation and marine delivered 51% of total revenues in the second quarter and rose 8% over the year-ago quarter. It also announced the expansion of its relationships with car makers Volkswagen (OTC:VLKAY) and Mini (OTC:BAMXY), which should help to stabilize its revenue in the Automobile segment over the coming quarters. Over the long term, the company remains focused in innovation as the primary source of revenues and earnings growth.
Regarding its dividend, at the annual meeting in June, 2012, shareholders approved a cash dividend in the amount of $1.80 per share, payable on a quarterly basis at a rate of $0.45 per share. This dividend should continue through March 31, 2014, and Garmin expects to pay a quarterly dividend for the foreseeable future. Additionally, Garmin has a $300 million share buyback programme ongoing through the end of 2014.
Its dividend payout ratio was about 65% in the past year, which is acceptable given the company's strong profitability and relatively stable business. This payout ratio seems sustainable given the company's guidance of $2.30 to $2.40 for 2013 EPS, and gives the company some flexibility to finance growth. Moreover, given its growth prospects outside Auto/Mobile it has room to increase the payout ratio and distribute a higher dividend to shareholders.
Furthermore, the company's dividend is also supported by its strong balance sheet. Garmin has zero debt, and is increasing its cash hoard. At the end of the second quarter, it had cash and marketable securities of $2.7 billion. Moreover, the company's cash flow generation capacity is also very good, given that it generated $186 million of free cash flow just in the second quarter of 2013 and completely funded its quarterly dividend of $88 million and share repurchase activity of $13 million.
Despite the headwinds Garmin faces in the PND market, its other divisions continue to achieve strong growth and should lead Garmin to stable or growing earnings over the next few years. Its dividend yield is very attractive at 4.6%, being supported by the company's strong balance sheet and very good cash flow generation capacity. Moreover, contrary to many dividend stocks Garmin appears to be fairly valued, making it a compelling investment for income investors.