Global positioning satellite navigation has gone from the stuff of science fiction to an everyday experience for millions of people around the world, and Garmin (NASDAQ:GRMN) has been instrumental in getting GPS equipment into the hands of ordinary consumers. Garmin's success allowed it to start paying sizable dividends to its shareholders, and currently, the stock yields more than 3.5%. But with some core threats to some of its most important segments, Garmin raises some concerns that dividend investors need to know about. Let's look more closely at two things every dividend investor should know about Garmin right now.
1. Garmin's dividend depends on its ability to manage the decay rate of its automotive and mobile segment.
Right now, Garmin investors are most excited about the company's prospects in some of its niche areas. In the fitness industry, for instance, Garmin devices help runners, cyclists, swimmers, and other athletes monitor their progress and their biometrics at the same time. Sophisticated applications for use in aircraft and marine vessels provide critical information for pilots to navigate even under the harshest conditions in which more rudimentary navigational aids typically fail. When you look at the growth rates in these businesses, they hold out the promise of being the answer to Garmin's recent sluggishness.
But the problem is that Garmin's core automotive and mobile segment still dominates the overall business, and its prospects have weakened significantly in recent years. Since 2009, Garmin's revenue from its auto and mobile segment fell more than 35%, and its share of the company's overall sales went from around 70% to less than 50%. Pre-tax profits show a similar picture, with Garmin making less than half as much from the segment last year as it did in 2009.
Since then, Garmin has done its best to make the most of a decaying business, as sales declines have decelerated in the past three years, and net income has actually rebounded sharply since 2011. But with simple GPS navigational systems having become ubiquitous even in many low-end mobile devices, it's hard for Garmin to distinguish itself to those who don't necessarily need a premium experience. Nevertheless, without at least slowing the pace of the segment's downward trajectory, Garmin will have a hard time getting enough growth from its other businesses to prevent an overall slide.
2. Garmin will need to fight hard to sustain its fitness-wearables advantage.
For true competitors, Garmin's fitness wearables have the respect of athletes everywhere, with GPS connectivity helping the company stand apart from similar products. Yet Garmin now faces the rise of the smartwatch revolution, and with fitness applications at the core of the movement, Garmin has to defend its turf and demonstrate its value proposition to the users most likely to buy its products.
At least for now, Garmin still has a chance to outperform its competition. With Apple's (NASDAQ:AAPL) new Apple Watch due out next year, many are concerned that Garmin could get crushed by competition. But a lot depends on whether fitness enthusiasts will be able to get the performance they need strictly from an Apple Watch, or whether they'd need to have a paired iPhone with them on their workouts. Garmin devices largely allow users to rely on the watch itself during a workout, only pairing later with other devices to provide more detailed feedback. If Garmin can keep emphasizing those aspects of its products while also making it easier for them to share data via social media applications, then the company should be able to maintain its reputation against Apple and other competitors.
Garmin has had many dividend investors worried about its future, especially as revenue and net profits have fallen dramatically from their best levels. Garmin certainly faces a tough challenge ahead, but it still has a viable path that could both preserve the dividend income investors have come to take for granted as well as provide opportunities for growth in the future.
Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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