Warren Buffett's Berkshire Hathaway is unique in many ways. Buffett has built the conglomerate with cash-generating companies that can succeed over the long term thanks to wide moats in their businesses -- and he seeks out more businesses like that in his investment portfolio.

If you're looking for investments that fit the mold yourself, one company that generates enormous cash flow, has a debt-free balance sheet, and pays a nice dividend is Garmin (NASDAQ:GRMN), a maker of outdoor recreation devices. Garmin's initial success was with personal navigation devices (PNDs), when GPS systems first became popular. But the company has shown that with advancing technologies, it can stay ahead of consumer demand for new GPS devices.

woman runner checking GPS watch

Image source: Getty Images.

The business is thriving

Garmin isn't just a stodgy old income-generating cash cow. Like most consumer retail businesses, its growth took a pause earlier this year due to impacts from the pandemic, but it has bounced back quickly. The company's products have gained popularity with boaters, pilots, hunters, and outdoor exercise enthusiasts.

Its four growth segments -- fitness, outdoor, marine, and aviation -- make up almost 90% of total net sales. Many people still think of the old automotive GPS devices when they hear the name Garmin, but that segment has become less and less relevant as the others prosper. Year-over-year sales growth of the major segments in 2019 broke down this way:

  • Fitness, 22%
  • Outdoor, 13%
  • Marine, 15%
  • Aviation, 22%

There are several reasons to believe the growth will continue for Garmin. Externally, the business has a track record of making smart acquisitions -- more on that in a bit -- and internally, its research and development spending increases in the low double digits quarter after quarter, including 18% most recently.

Buffett loves cash

Whether in the form of free cash flow from the business, dividends paid to shareholders, or a mountain of cash on the balance sheet, Buffett loves cash. Garmin has it in all three forms. 

In its recently reported third quarter, the company generated twice the free cash flow it needed to cover its quarterly dividend, which currently yields about 2% annually. And that's not just a flash in the pan. Below is the free cash flow for the company over the past five years. 

GRMN Free Cash Flow Chart

GRMN free cash flow data by YCharts.

Garmin ended its third quarter with cash and marketable securities of approximately $2.7 billion, and zero debt on its balance sheet. Those are numbers Buffett should love. And this strong balance sheet also helps the company reinvest in its business.

More than 10 years ago, Garmin's management launched a strategy of acquiring many of its foreign distributors. It bought up many of those in Europe, South America, and South Africa. Bringing distributors under the corporate umbrella helped to strengthen sales in these markets, growing global market share and bringing efficiencies and cost savings. More recently, in April 2019, it closed its acquisition of Tacx, a private maker of indoor bike trainers, tools, accessories, and software. This strategy was a success even prior to the pandemic. It said in its first-quarter conference call in April that it had designated capital spending toward building a new factory for Tacx in 2020, to keep up with demand. 

On top of trends

The purchase of Tacx seems timely as indoor cycling has gained popularity with businesses like Peloton Interactive coming on the scene. But the pandemic has also energized people to seek more outdoor recreation activities.

The popularity of outdoor biking, hiking, and running has grown. Boat manufacturers and makers of recreational vehicles (RVs) have been reporting strong sales and backlogs. These trends are likely to continue. For Garmin, this can benefit its growing areas where people hike and bike on these trips. But it also recently launched its RV 890 navigator, designed specifically for the RV and camping lifestyle, which could help boost the auto segment.

A price Buffett can afford 

Whether he's buying a portion of a business through stock, or the entire company, Buffett doesn't like to overpay. Garmin's current price-to-earnings ratio just under 22 isn't excessive. In fact, it's in the range where the stock has traded for the past several years. 

With the strength of the business, current trends potentially adding more tailwinds, and its cash generation, it's hard to see why Warren Buffett wouldn't love Garmin.