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Is It Worth Considering Garmin Ltd. (NYSE:GRMN) For Its Upcoming Dividend?

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Garmin Ltd. (NYSE:GRMN) is about to trade ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Garmin's shares before the 14th of December in order to be eligible for the dividend, which will be paid on the 30th of December.

The company's next dividend payment will be US$0.73 per share, on the back of last year when the company paid a total of US$2.92 to shareholders. Calculating the last year's worth of payments shows that Garmin has a trailing yield of 3.1% on the current share price of $95.61. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Garmin

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Garmin paid out more than half (58%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 187% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Garmin paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Garmin's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Garmin's earnings per share have been growing at 13% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Garmin has delivered 5.0% dividend growth per year on average over the past 10 years. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

The Bottom Line

From a dividend perspective, should investors buy or avoid Garmin? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Garmin paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

With that being said, if dividends aren't your biggest concern with Garmin, you should know about the other risks facing this business. Every company has risks, and we've spotted 1 warning sign for Garmin you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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