One 4.2% Yielder You Should Consider Buying

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Garmin (NASDAQ: GRMN) is finding new life after being added to the S&P 500 Index earlier this week. Garmin is a provider of navigation devices, but is facing stiff competition from mobile phone-based navigation. After coming off a $120 high in 2007 and hitting rock bottom at $15 a share in 2009, Garmin has been searching for its place in the tech world. Garmin is down 60% over the last five years, but has managed to be up 5% year to date. Let's take a look at this stock in more detail.

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 (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 (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.

The mobile companies causing issues for Garmin include Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). These mobile phone makers already offer built-in GPS services. Apple has managed to miss earnings estimates each of the last two quarters. Even with the misses, the tech giant is still a major growth story. Apple is gaining market share in the mobile sector, but Google’s Android devices still leads the market (see what this Google exec thinks of the "Mobile Battle.")

Google, meanwhile, is one of the leading search companies out there, with 3Q results also missing consensus. Latest weakness was a result of continued losses in its recently acquired Motorola Mobility segment. Both of these tech giants still appear to offer investors significant growth opportunities given their diverse product portfolios; Google has a long-term expected earnings growth rate of 13.5%, while Apple's estimates range from 20-25% annually. These two stocks are also on our list of tech stocks loved by hedge funds (see our entire Top Ten here).

For investors looking to play the ever-changing tech market, we believe there are other investment opportunities besides Garmin that are better suited for robust growth. What we do like, though, is Garmin’s dividend payout and its growth initiatives, which will be key in supporting income investors going forward. Garmin has solid exposure to the auto markets, and will have a number of new investors given its addition to the S&P 500 Index. Although we see little room for multiples expansion given the infringement of GPS-powered mobile phones on Garmin’s market share – even though it did spend 11% of revenues on R&D in 2011 – we do like Garmin’s ability to generate cash and return it to shareholders.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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