Garmin: A Steady Income Play with Room to Run

In a world where dividend cuts and yield compression dominate headlines, Garmin Ltd (NASDAQ: GRMN) stands out as a rare gem. With an 8-year dividend growth streak, a 37% payout ratio (well below industry norms), and record 2024 earnings, the company's financial discipline positions it as a compelling income investment. Let's dissect Garmin's sustainable dividend policy, robust free cash flow (FCF), and valuation upside.

Dividend Policy: A Model of Prudence

Garmin's dividend growth has been methodical, with an average annual increase of 5.1% over the past decade. In 2024, it hiked its payout by 13%, bringing the annual dividend to $3.60 per share—a stark contrast to peers like Fitbit (FIT) and Peloton (PTON), which faced headwinds.

What makes Garmin's dividend sustainable? Its payout ratio—the percentage of earnings paid out as dividends—has averaged just 37% over the past three years. This compares favorably to the 44% median payout ratio in the hardware sector. A low payout ratio signals two things:
1. Safety: Earnings shocks are less likely to force a dividend cut.
2. Growth potential: Retained earnings can fuel innovation or buybacks.

Financial Strength: Cash King with Minimal Debt

Garmin's record 2024 performance ($6.3 billion in revenue, up 20% YoY) was powered by all five segments—Fitness, Outdoor, Aviation, Marine, and Auto OEM. Even its smallest segment, Auto OEM, saw a 30% revenue surge, albeit with a minor loss.

The key metric here is free cash flow (FCF), which underpins dividend sustainability. Garmin generated $1.59 billion in operating income in 2024, with FCF margins hovering around 30%—a testament to its pricing power and efficient capital allocation.

Why does this matter?
- FCF/Dividend Coverage: Garmin's FCF is 2.7x its dividend payments, ensuring ample cushion.
- Shareholder Yield: Garmin returned $33 million to shareholders via buybacks in Q4 2024, with $238 million remaining in its repurchase authorization. Combined with dividends, this gives a total shareholder yield of ~5%—higher than its sector average.

Valuation: Undervalued Compared to Peers

At a 1.39% dividend yield (as of June 2025), Garmin trades at a discount to hardware peers like Apple (AAPL, 0.65%) and Garmin's own historical averages. However, this undervaluation creates an opportunity:

• P/FCF Multiple: Garmin's 32.45x P/FCF (2024) is reasonable given its 19.6% ROCE (Return on Capital Employed). For context, the sector median is 25x, but Garmin's niche dominance (e.g., 75% market share in aviation GPS) justifies a premium.
• Growth Catalysts:
• 2025 Guidance: Revenue is expected to hit $6.8 billion (+8% YoY), with margins held steady at 25%.
• Product Launches: Garmin's pipeline includes upgraded marine and fitness devices, targeting high-margin markets.

Investment Thesis: Buy the Dips, Hold for Income and Growth

Why now?
1. Low Payout Ratio Leaves Room for Growth: At 37%, Garmin can easily raise dividends without straining earnings. The 2026 dividend schedule—set to increase to $0.90 per quarter—signals confidence.
2. Strong Balance Sheet: With $3.5 billion in cash and minimal debt, Garmin can weather economic slowdowns or supply chain hiccups.
3. Undervalued Yield: At 1.39%, Garmin's yield is 40% below the hardware sector's average of 2.0%, suggesting a reversion opportunity.

Risk Factors:
- Competition: Apple's HealthKit and Alphabet's (GOOG) wearable ventures could erode fitness margins.
- Geopolitical Risks: Supply chain disruptions in China (a key manufacturing hub) could pressure margins.

Final Take: A Buy with a 5-Year Horizon

Garmin's combination of a conservative payout ratio, robust FCF, and underappreciated valuation makes it a standout income investment. For long-term investors, the $0.90 dividend per share (yielding ~1.4%) paired with 5-7% annual growth in earnings and dividends could deliver high-single-digit total returns over five years.

Actionable Idea:
- Buy: Use dips below $65 (a 15% discount to its 52-week high) to accumulate.
- Hold: Garmin's dividend safety and growth trajectory justify a 3-5 year holding period.

In a market starved for reliable income stocks, Garmin offers both stability and upside—a rare blend in today's volatile landscape.