Many stock analysts draw a distinctive line between growth stocks and income stocks. It's not common that a company can have a high growth rate while already in a position to generate enough free cash to continue investing in the business and returning a large amount of capital to shareholders. 

But GPS-enabled device maker Garmin (NASDAQ:GRMN) has been doing just that. Revenue grew 25% in the first quarter of 2021 thanks to heightened interest in outdoor recreation spurred by the pandemic. But the company has also had five straight years of growing revenue and operating income, including double-digit revenue growth in 2020. 

People doing various outdoor activities.

Garmin's products are used in a wide range of outdoor activities. Image source: Garmin.

A pivot in the right direction

Five years ago, almost 30% of Garmin's sales were products from its automotive segment. But automotive personal navigation devices (PNDs) were becoming obsolete, and Garmin shifted its focus to expanding its offerings in fitness, outdoor, aviation, and marine products. By 2020, those segments represented almost 90% of sales. 

That pivot occurred as overall revenue has grown by 50% in those five years. And the growing segments that are popular with runners, bikers, hunters, golfers, boaters, and recreational pilots have also brought better profit margins. That's helped the $28 billion market cap company almost double free cash flow to $950 million in 2020. And that included a second quarter where sales were negatively affected by the pandemic as retailers closed down.

Charts showing upward trends in Garmin's revenue, operating margin, and free cash flow.

GRMN Revenue (TTM) data by YCharts.

Capital for growth and investors

Some of Garmin's free cash flow is going to shareholders in the form of dividends. And those payouts have grown along with the business. The dividend is more than 30% higher than it was five years ago, and currently yields 1.8% after the most recent proposed increase. Those payments should account for less than half of 2021 cash flow, and the company also had $3.2 billion in cash and marketable securities as of March 27, 2021. 

The company has grown that cash balance even while investing to grow the business as well. Garmin acquired privately held indoor cycling company Tacx in 2019, and in its 2020 first-quarter conference call, it told investors it was directing new capital spending to build an additional Tacx manufacturing plant to keep up with demand.

The company also acquired Firstbeat Analytics, a provider of data analytics for its health, fitness, and performance devices, last year. In 2021, it bought aircraft data solutions company AeroData to boost its business in the commercial and business aviation market. 

In addition to acquisitions, Garmin pours its cash flow into research and development (R&D) to continue to innovate. R&D spending has grown 23% year over year in each of the last two quarters, and has increased an average of almost 19% in the last year. 

Seven hands in a circle showing Garmin watches.

Image source: Garmin.

What to watch for

Garmin shares are trading at a record level, and are up more than 50% in the last 12 months. The company has told investors it expects revenue to grow about 10% in 2021 compared to 2020. Management has typically been conservative, having beaten its original fiscal year revenue guidance by an average of almost 6% over the last three years. So it wouldn't be surprising to see the company exceed guidance again in 2021. 

But it is still trading at a lofty forward price-to-earnings (P/E) ratio of over 27 -- though the market likely assigns it a higher multiple with the company having more than 10% of its market cap in cash. So if the company doesn't exceed its guidance in the next few quarters, it won't be surprising for shares to retreat, at least in the short term.

The marine segment has also been extremely strong, as pandemic trends have boat manufacturers' backlogs at record levels. Garmin's marine segment year-over-year growth has averaged 43% over the last three quarterly periods. Boat manufacturer Brunswick (NYSE:BC) recently announced it has acquired Garmin's smaller competitor Navico, which makes Lowrance and Simrad boating fish finder and chart plotter GPS systems. 

Garmin doesn't break out its sales by customer in its segment. But investors should monitor whether any slowing growth in the marine segment may be from lost business with Brunswick, or simply normal sector variation. At its current share price, it may be wise for investors to ease into Garmin stock. But with a dividend that should continue to grow, and a balance sheet loaded with cash and no debt, it's a stock worth having in a portfolio for the long term. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.