Although sales are expected to be flat for 2012 (2% growth) and 2013 (1% growth), we believe that long-term prosperity will come from rising sales in emerging markets, namely Asia. Additional help will be a result of auto sale gains due to a recovering economy, and an "aging out" of vehicles. Beyond the personal navigation devices, growth will come from the outdoor and fitness segment. This area should get a boost from rising discretionary spending and a boost in health-conscious individuals.
In short, it appears that the true value for Garmin shareholders might not lie in a robust growth road map, but a solid income-generating one. Starting in mid-2011, the GPS company began to display a penchant for giving cash to shareholders. Garmin’s shares now have a dividend yield of 4.2% after boosting their dividend payment by 12.5% earlier this year.
The company also has a solid ability to continue to generate cash. Garmin has nearly $1.4 billion in the green stuff, while its annual dividend payout is still just around $350 million. This cash generating ability comes from the fact that Garmin has no debt and a solid return on equity of 17.5%. Another positive is that Garmin’s payout ratio is only 55%; earnings would have to miss next year's estimates by over 20% before its payout ratio breached 80%.
R.R. Donnelley & Sons Company (NASDAQ:RRD) is the stock that was kicked out of the S&P 500 Index to make room for Garmin. Donnelley has seen its market value steadily decline – down 40% over the last five years – and is getting bumped down to the S&P 400 Midcap Index. Donnelley has made recent acquisitions to expand beyond its typical segments in an effort to stop its stock’s slide. The global communications company pays an 11% dividend yield and should be able continue these outlays, at least in the interim. Donnelley has over $300 million in cash, and pays out $185 million in annual dividends. Billionaire Ken Griffin – founder of Citadel Investment Group – is one of R.R. Donnelley’s top supporters (check out Ken Griffin’s newest picks).
Garmin has similar exposure to the auto industry as Harman International Industries Inc. (NYSE:HAR). Harman is the audio equipment company that is undergoing similar pressures as Garmin. Harman expects FY2013 revenues to be up 6% after a 16% gain in 2012. This will be driven by a rise in auto sales, which already have a $16 billion order backlog, including recent contracts with Toyota and General Motors. The major headwind for Harman will be a weak global economy, but we believe that its exposure to autos will be the major driver of its expected 15% long-term earnings growth rate.