A high dividend yield like the 5.3% Garmin (GRMN) offers is usually a big red flag, a sign that something has gone seriously wrong with the business model. And if you, like so many, long ago replaced your Garmin dashboard GPS with a smartphone app, you understand what happened here. For investors now, the question is whether the cash Garmin generously pays investors will dry up before it builds enough sales in products Apple (AAPL) can’t kill.
Garmin has a lot of cash. A chart showing Garmin’s dividend payout ratio and its cash dividend payout ratio illustrate key reasons some investors are still comfortable buying shares of a company whose core product is going the way of compact disks.
A steep drop in its share price recently was a stark reminder that an investment in a turnaround is only as good as the turnaround itself, regardless of the dividend paid. If you lose 10% or worse on the sale of the shares, even a 5% yield looks paltry. And it’s not clear that Garmin’s plan is going to turn around the company’s fortunes (or its share price) any time soon.
Garmin grew to fame selling personal navigation (GPS) devices, and it remains the biggest seller of these even as smartphones and factory-installed vehicle systems move them toward obsolescence. It hopes to replace these declining revenues with sales of specialty GPS devices. Problem is, the latest earnings released Feb. 20 indicate that its products in these markets aren’t going as well as expected. In the all-important fourth quarter (think Christmas presents), sales in all divisions declined from the year before except in fitness, where they were up 10%. Its own revenue forecast calls for more than 6% decline in overall revenues this year and declines in profit margins.
Better numbers in 2014 depend on Garmin developing very unique or superior products that can’t be overtaken by cheap imitators or phone apps. In fitness, the company has done well with things like GPS-enabled watches for runners, and course maps for golfers that include detailed statistics aimed at improving the game. But Nike (NKE) and many lesser names are in the business too, and golf has its own phone apps. They have less competition in more sophisticated aviation and marine systems, which sometimes involve regulations that scare off newcomers. Enthusiasm for these products have helped keep Garmin shares trading at a PE ratio above some other troubled tech companies, like Hewlett-Packard (HPQ).
Some analysts are optimistic. The plan, paired with the cash, convinced William Blair & Co. to initiate coverage mid-February with an outperform rating. Canaccord Genuity came on as buyers in January. Those analysts have some, but not a lot, of company. In December, Goldman Sachs’ derivatives strategists instructed their clients how to make money by betting on Garmin share price declines. From the share price chart above, it looks like they made out pretty well.