Why Garmin Is Likely To Return More Cash To Its Shareholders

Aug.12.14 | About: Garmin Ltd. (GRMN)


Garmin surprised the market with growth of net sales and strong margins.

Cash flow from operating activities was strong, supporting capital returns.

Upcoming restructuring indicates additional capital returns in the future.

A while ago, I published this article stating Garmin (NASDAQ:GRMN) has 45% upside potential. I named growing net sales and improving gross margin as two of the most important catalysts to drive the company's performance and stock higher. Since I published the article, Garmin's stock gained almost 16%. After the company reported its first quarter and second quarter earnings, I believe Garmin is in better shape than ever. Therefore, dividend investors should consider Garmin as a stock to own, even considering that the shares trade 16% higher at $55 a share. Further, I find evidence in Garmin's earnings call transcript that indicates the company is preparing for even more capital returns to its shareholders.

Turnaround to net sales growth

In past years, investors worried if Garmin was capable of turning its declining net sales around. I have to say that Garmin really surprised me, and probably the rest of the market, by reporting a strong revenue increase in both the first and second quarter of this year. Net sales rose 10% in the first quarter and net sales growth accelerated to 12% in the second quarter. Net sales growth in the first half year was supported by impressive growth in Garmin's fitness segment - net sales rose to $251 million in the first half year of 2014, up 60% from $157 million in the first six months of last year.

Next to impressive net sales, Garmin managed to improve its gross margin to 57% in the first half year, up from 54% in 2013, and its operating margin to 25%, up from 20% in 2013. Again, fitness was the best performing segment in the second quarter of 2014. Fitness segment gross margin was 65% and the operating margin was 42%, both well above the company's average margins.

Strong cash flow

One of the important factors to watch is the company's cash flow, as dividends and share repurchases need to be fueled by strong cash to be sustainable in the future. Garmin earned $235 million in cash from operating activities in the first six months of 2014, down from $265 million last year. The decline was due to changes in working capital. Excluding changes in working capital, cash flow from operating activities increased from $312 million to $381 million, an increase of 22% y-o-y.

Although Garmin does not have a long history of paying dividends (source: Nasdaq.com), I consider Garmin a dividend stock, because the company currently returns a healthy amount of capital to its shareholders through dividends and share repurchases. Garmin pays a dividend of $1.92 per share, representing a 3.44% yield based on yesterday's close. Further, Garmin repurchased $162 million worth of its own stock and the company expects to repurchase another $79 million during the second half of this year.

Planned restructuring

Investors should note that Garmin plans to restructure several of its U.S. subsidiaries in the second half year of 2014. The announcement was made during the company's earnings call on July 30, 2014. Garmin will transfer several U.S. subsidiaries underneath its Taiwan subsidiary. I believe the planned restructuring is very good news for dividend investors. According to CFO Rauckman, the announced restructuring mentioned above will free invested cash and Garmin will be able to repatriate cash to its Swiss parent holding, without a negative impact on the company's effective tax rate.

The explanation by CFO Rauckman implies that Garmin is preparing to at least continue its current shareholder friendly policy, without the negative impact on its effective tax rate. Naturally, the planned restructuring is not free of charge. Rauckman expects Garmin to pay around $300 million in taxes in the next twelve months to complete the restructuring. Garmin has a very strong balance sheet. On June 30, 2014, the company holds $2.8 billion in cash and marketable securities and no interest bearing debt. There the $300 million tax bill will not be an obstacle for further dividend increases and/or share repurchases.


In my opinion, Garmin is a solid dividend stock (yield: 3.44%). Additionally, the company has $79 million left under its current share buyback program. Garmin delivered very strong results in the first half year of 2014, which supported the 22% increase of cash flow earned from operating activities before changes in working capital. Further, the company announced a global restructuring in order to repatriate cash, without a negative impact on the company's effective tax rate. Following the strong results and the planned restructuring, I believe it is very likely that Garmin will increase its efforts to return cash to its shareholders.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.