Published by Bob Ciura on March 30th, 2017
Joel Greenblatt is the Managing Principal and Co-Chief Investment Officer of Gotham Asset Management, which invests approximately $15 billion, both on the long and short side.
On the long side, Joel Greenblatt has shown a fondness for cheap, high-yield dividend stocks.
Garmin (GRMN) is one of the top 20 dividend stocks in Joel Greenblatt’s portfolio.
Garmin is not on the list of Dividend Achievers, because the company has held its quarterly dividend steady since 2015.
The Dividend Achievers are a group of 271 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
That said, it’s easy to see why Gotham owns the stock—Garmin has a low valuation, and a hefty 4% dividend yield.
This article will discuss Garmin’s current financial performance, future growth prospects, and whether it is an attractive stock for dividend investors.
Garmin was founded in 1989. Today, it designs and manufactures GPS navigation and wearable technology.
The company operates five separate business segments, which are listed below:
- Auto (29% of annual revenue)
- Fitness (27% of annual revenue)
- Outdoor (18% of annual revenue)
- Aviation (15% of annual revenue)
- Marine (11% of annual revenue)
Garmin is diversified from a product standpoint, and it is also diversified geographically. The company operates in the following markets:
- Americas (50% of annual revenue)
- Europe, Middle East, & Africa (37% of annual revenue)
- Asia-Pacific & Australia (13% of annual revenue)
Garmin’s overall financial performance in 2016 was very strong.
For example, revenue increased 7% to $3 billion for the year. In addition, adjusted earnings-per-share rose 14% to $2.83 in 2016.
The major blemish on Garmin’s fundamentals is its automotive business. This is the segment that manufactures GPS devices for vehicles.
Source: Q4 Earnings Presentation, page 10
Revenue in the auto segment declined 17% in 2016.
Garmin has fallen behind in the automotive category, due to the widespread adoption of GPS in mobile devices.
Instead of buying a Garmin device, consumers simply utilize the GPS functionality on their smartphones.
In response, Garmin has aggressively invested in new product areas, which is working well.
Revenue in the company’s other four categories collectively increased 21% in 2016, and now represent nearly three-quarters of the company’s total annual revenue.
Going forward, Garmin’s two major growth catalysts are new product technologies, and expansion into the international markets.
One of the most attractive growth catalysts for Garmin is its fitness product segment.
Source: Q4 Earnings Presentation, page 7
Fitness-related products are selling very well, due to the emerging health and wellness trend, and growing popularity of wearable fitness devices.
Garmin’s fitness device sales increased 24% in 2016, and expectations are for another 5% revenue growth in 2017.
Next, Garmin’s outdoor segment, which includes wearable navigation devices, is booming.
Source: Q4 Earnings Presentation, page 6
This segment produced 33% revenue growth in 2016, and Garmin expects 10% revenue growth in the outdoor business in 2017.
Lastly, Garmin’s international business is a growth catalyst. All geographic regions posted strong growth in 2016.
For example, the EMEA and APAC markets increased revenue by 10%, and 14%, respectively, which was well above the 4% growth rate in the Americas.
However, Garmin is still having trouble getting past the declines in the automotive business, which is expected to weigh on the company again in 2017.
Source: Q4 Earnings Presentation, page 11
Management expects flat revenue in 2017, even with strong growth from the outdoor, fitness, marine, and aviation categories.
Once again, the automotive segment is likely to be a major drag—Garmin expects a 17% expected decline in auto product sales.
And, due to continued investment in the other four product categories, Garmin expects earnings-per-share to decline 6.3% in 2017.
Competitive Advantages & Recession Performance
In the technology industry, the main competitive advantages are brand strength, and economies of scale.
However, competitive barriers are generally thin. Changes in the technology industry take place quickly, such as the obsolescence of GPS devices used in cars.
Moreover, that technology companies are vulnerable to recessions.
Garmin’s earnings-per-share during the Great Recession are shown below:
- 2007 earnings-per-share of $3.89
- 2008 earnings-per-share of $3.48
- 2009 earnings-per-share of $3.50
- 2010 earnings-per-share of $2.36
As you can see, Garmin did not perform particularly well during the recession. This is not surprising, given that the company operates in technology, which is a cyclical industry.
Aside from a strong brand, Garmin has an added competitive advantage, in the form of an excellent balance sheet.
At the end of 2016, Garmin held $1.1 billion of cash and short-term investments, along with $1.2 billion of long-term investments on its balance sheet.
By comparison, Garmin has just $782 million of current liabilities, and virtually no long-term debt.
This is a competitive advantage, because it allows the company the financial flexibility to be nimble, and make long-term investments in new product technologies.
Source: Q4 Earnings Presentation, page 18
For example, the company accelerated research & development and advertising spending over the course of 2016.
Advertising helps maintain the brand image with consumers, and R&D is crucial to developing new technologies.
This spending will weigh on Garmin’s earnings in 2017, but the hope is that the investment will help the company return to growth over the long-term.
Valuation & Expected Total Returns
Based on Garmin’s 2016 adjusted earnings-per-share, the stock currently trades for a price-to-earnings ratio of 18.
This is a fairly modest valuation multiple, considering Garmin’s strong revenue and earnings growth. The S&P 500 Index has an average price-to-earnings ratio of 26.
The reason why the stock is cheap, is likely due to the declines in its largest business segment, as well as expectations for earnings-per-share to decline in 2017.
If Garmin returns to growth in 2018, the stock could see expansion of the price-to-earnings multiple.
A potential breakdown of Garmin’s long-term returns is below:
- 5%-7% revenue growth
- 1% earnings growth from share repurchases
- 4% dividend yield
As a result, potential returns could reach 10%-12% per year, from 6%-8% earnings growth, and a 4% dividend yield.
Garmin does not expect to raise the dividend over the next year. This is understandable, given the company’s top priority is to turn around its automotive business, and invest in new growth areas.
However, a 4% dividend yield is still very generous—the average dividend yield in the S&P 500 Index is just 2%.
Joel Greenblatt is a noted value and dividend investor, and has loaded Gotham’s stock portfolio with cheap, high-yield dividend stocks.
Garmin fits the bill, with a low valuation and a solid 4% dividend yield.
To see another stock owned by Joel Greenblatt that has a discounted valuation and pays a 4% dividend yield, click here.
Garmin’s valuation remains low, as investors are doubting whether the company can offset the declines in its largest business segment with growth in new product segments.
While Garmin’s turnaround may take longer to materialize, investors are paid well to wait.