We're now a long way removed from the high-growth stock hype of 2021. Investors have taken a hard left and are now favoring highly profitable businesses that pay dividends. But the ability to dole out quarterly income isn't a lifesaver. Take Swiss tech company Garmin (GRMN +1.16%) as an example. Shares are down 54% from their peak last year as sales cool down from an early pandemic consumer spending frenzy.
NYSE: GRMN
Key Data Points
After the massive sell-off, Garmin stock is now paying a 3.5% annualized dividend yield. Is it time to start nibbling if investment income is your preference?
Garmin fitness is off course
Once upon a time, Garmin was primarily a GPS (global positioning system) device company. It still makes products geared toward the marine, aviation, and auto industries. But these days, the company's main breadwinner is wearable gear for fitness and outdoor enthusiasts.
And that's been part of the problem as of late. Garmin's outdoor segment (led by its "adventure watches," smartwatches for hikers and the like) has been a fantastic guide for the company. Outdoor sales were $767 million in the first half of 2022, up 32% year over year. But the fitness segment, its largest in 2021, dropped 32% year over year to $493 million. Its indoor cycling products are in decline (yup, it isn't just Peloton (PTON +1.39%) hurting), as are its other smartwatches that more directly compete with the likes of Apple (AAPL +2.59%) and Android-powered devices.
The rest of the business has been fairly stable, though some GPS products for marine and auto have been throttled by supply chain issues. Nevertheless, because of the overall flatlining of revenue so far in 2022 (up just 1%) and a modest rise in operating expenses like research and development (up 10%), Garmin's operating profit margin has declined significantly. The first-half 2022 operating margin was 21.6%, compared to 25.9% last year.
Granted, tech hardware sales -- especially those aimed at consumers -- tend to be cyclical for just about every company on the planet (even Apple, though to a lesser extent). Operating margins thus fluctuate, as they have in the past for Garmin. But for a dividend-paying company, too much of a dip can spell trouble for that payout. The company's full-year guidance for revenue to fall 25% year over year and operating margin to be just 20% implies more dip lies ahead. Is Garmin in trouble?
A history of payout increases
This particular cyclical cool-off is looking like it will be as abrupt as Garmin's early pandemic run-up was. That's why the stock has reacted so dramatically in the last year. But Garmin is hardly in trouble -- and neither is its dividend.
Like the rest of the consumer electronics industry, it appears that high inflation has households reassessing where they spend in favor of more basic items. So far, though, the global consumer appears to be in good health for now. Garmin is releasing refreshed product lineups and is still enjoying growth within certain segments of its business, even as overall revenue is being dragged down by a reduction in fitness gear spending.
As for the operating margin, at 20% (or $1 billion based on the $5 billion in expected revenue), that's still more than enough to cover the dividend payment. Through the first half of the year, Garmin's payout cost only $258 million.
This tech company thus has a wide margin of safety on its shareholder return program and ample space to increase that payout over time. In fact, that has been Garmin's focus. As it has steadily grown its product portfolio over the years, it has been able to steadily grow its quarterly payout, up 57% over the last decade. It's not the biggest dividend increase, but Garmin is doing just fine in this department.
Add to this the fact the company had $1.61 billion in cash and short-term investments, another $1.25 billion in longer-term marketable investments, and no debt. Garmin is still a rock-solid business as it weathers the current economic storm and slowing consumer spending. Indeed, analysts project the company could still manage double-digit earnings growth for the next five years.
Garmin shares currently trade for 17 times enterprise value to earnings (or 38 times on a free cash flow basis), so this isn't exactly a cheap stock. Personally, I'd wait for more clear signs that sales are finding a bottom before nibbling. Nevertheless, if you think Garmin's revenue can make a comeback in 2023 as analysts anticipate, this top tech dividend is worth keeping on your proverbial investment GPS.
