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Despite reports on CNBC Wednesday that GPS maker Garmin (NASDAQ:GRMN) had doubled its annual dividend from $0.75 to $1.50 per share, a thorough reading of the company’s press release shows that this increase is “one-time” in nature, meaning that Garmin has decided to add $0.75 to its dividend this year, but that investors should not assume it will necessarily stay at that level in 2011 and beyond. A few firms choose this type of dividend policy; paying out a standard rate every year and then, based on cash flows at the time, perhaps choose to pay out special dividends as well. Oil driller Diamond Offshore (NYSE:DO) is another company that uses this policy.

Had Garmin actually boosted its core dividend to $1.50 per share, it would have been very good news (technology firms typically do not sport 4%+ dividend yields), but without assurances that this is not just a one-time event (the company actually used “one-time” in its own handpicked wording) investors who bid Garmin stock up $2 on Wednesday based on an extra $0.75 of dividends may be a bit optimistic.

I wrote about Garmin recently (Introducing Smartphones Unlikely To Save GPS Hardware Firms Like Garmin) and although the stock is not expensive based on current earnings, I simply do not think the fundamental story for standalone GPS device makers is all that positive. As more and more devices come equipped with GPS capabilities in the future, profit margins are set to decline. If margins do drop, low P/E ratios today may be giving investors a false sense of security, as earnings could fall faster than revenue. Below is a look at some other large cap hardware companies along with their current trailing twelve month price-to-sales ratios.

hardwarepsr

I use price-to-sales as my preferred metric here because I do not have confidence that Garmin will be able to keep its margins as high as they have been in the past. Traditionally the hardware industry has been characterized by lots of competition and low margins. As you can see from the data provided, only a few unique firms can really maintain high margins in the hardware space (Apple (NASDAQ:AAPL) and RIM (RIMM) are leading the way right now due to product and brand loyalty). Low price-to-sales ratios indicate low profit margins because investors know that a lot of revenue per share is needed to made good money selling products.

Not only do I continue to be cautious on Garmin from a fundamental perspective, but Wednesday’s announcement and investors’ reaction to it (with help from some confusing reporting on the dividend hike) made it worth mentioning again.

Disclosure: Peridot Capital clients had no position in Garmin at the time of writing, but positions may change at any time.

Source: Garmin's Dividend Hike: Just a One-Time Deal