Garmin Stock: Navigate To This Great Dividend Grower (NYSE:GRMN)

Well-managed companies are able to continuously evolve with the times, making their products relevant not just for today but for many years to come. Such I find the case to be with Garmin (NYSE:GRMN), which has come a long ways since making their ubiquitous in-car navigation systems.

The stock had seen a solid trajectory in recent years, trading as high as $176 in 2021 before falling back to earth at $92 at present. As shown below, GRMN is now well off its highs over the past 12 months and is trading at levels not seen since 2020. This article highlights why GRMN should be on a dividend growth investor’s radar, so let’s get started.

Why GRMN?

Garmin is a leader in the design and manufacture of high quality GPS-enabled hardware and software, which are widely used in the aviation, marine, outdoor, and fitness industries. This means that Garmin’s solutions are used for both recreational as well as industry and defense needs.

The company has transformed itself from its early days, and has since shed most of its auto segment, enabling it to focus on the higher margin aviation marine, and outdoor segments. Garmin’s track record of innovation has resulted in a strong reputation and brand recognition amongst its customer base. This has translated into premium pricing and strong margins.

As shown below, GRMN scores a B+ grade for profitability, driven by very strong TTM gross profit and net income margins of 57% and 20%, respectively, sitting well in excess of their sector medians.

Encouragingly, GRMN’s gross margin improved by 40 basis points YoY to 58.8% during the third quarter, driven by favorable product mix. Revenue also grew by 2% YoY on a constant currency basis (4% decline including $70 million worth of FX headwinds) to $1.14 billion. While low single digit sales growth isn’t anything to scream about, it’s worth noting that GRMN had a difficult comparable due to pandemic driven sales in 2021, when consumers were flush with stimulus cash and spending more time outdoors.

Looking forward, GRMN has plenty of growth runway (pun intended) in the aviation market, considering its moat worthy reputation and technology leadership in the space. This is reflected by a recent survey by Aviation International News, ranking GRMN as number one in avionics product support for the 19th consecutive year.

Moreover, management recently announced that its G3000 integrated flight deck was selected by Archer Aviation (ACHR), a leader in electric vertical takeoff and landing aircraft, for its Midnight cockpit. Plus, Morningstar highlighted promising opportunities with the U.S. FAA in its recent analyst report:

Garmin has experienced better-than-usual tailwinds in its aviation segment as the U.S. Federal Aviation Administration implements its modernization initiatives, which include a switch from radar-based positioning of planes under air traffic control’s airspace to broadcast technology.

The switch required the installation of automatic dependent surveillance broadcast (ADS-B) out transponders in general aircraft (noncommercial) by January 2020. Even with the benefits of the mandate mostly incurred by now, we think the aviation segment will maintain its foothold in defense and general aircraft as the avionics space is highly regulated and Garmin has proved its ability to obtain original-equipment manufacturer wins.

Meanwhile, GRMN carries a fortress balance sheet with $1.5 billion worth of cash and short-term investments, and carries no long-term debt, and has just $100 million worth of capital leases. This lends support to the dividend, which currently yields 3.2% and is well-protected by a 55% payout ratio. Furthermore, GRMN has paid an uninterrupted dividend since 2003 and has an impressive 5-year dividend CAGR of 11.6%.

Turning to valuation, despite the 32% drop in its share price over the past 12 months, GRMN doesn’t scream cheap at the current price of $92 with a forward PE of 18.6. However, I believe it’s attractively valued considering the strength of the enterprise, impressive balance sheet, and the 8% to 17% annual EPS growth rate that analysts expect over the next two years.

Analysts have a consensus Buy rating on the stock, with an average price target of $114, representing a potential 27% total return from current levels.

Investor Takeaway

Garmin is a leader in its space, with products that uphold a high reputation in key industries. Looking forward, it has a long growth runway, especially in the aviation industry as customers seek to modernize their aircraft. With the material decline in share price, Garmin is an attractive option for those seeking exposure to a strong and growing enterprise with a fortress balance sheet, impressive track record of innovation, and strong dividend growth prospects.