Garmin Ltd. (NYSE:GRMN) has announced that it will be increasing its dividend on the 30th of June to US$0.73. The announced payment will take the dividend yield to 2.7%, which is in line with the average for the industry.
Check out our latest analysis for Garmin
Garmin's Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Garmin's dividend was only 52% of earnings, however it was paying out 113% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.
The next year is set to see EPS grow by 8.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 48%, which is in the range that makes us comfortable with the sustainability of the dividend.
Dividend Volatility
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2012, the first annual payment was US$2.00, compared to the most recent full-year payment of US$2.92. This means that it has been growing its distributions at 3.9% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
We Could See Garmin's Dividend Growing
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Garmin has impressed us by growing EPS at 9.7% per year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.
In Summary
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Garmin is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 2 warning signs for Garmin that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NYSE:GRMN
Garmin
Designs, develops, manufactures, markets, and distributes a range of wireless devices worldwide.
Outstanding track record with flawless balance sheet and pays a dividend.
