Updated on May 13th, 2022 by Quinn Mohammed
The decision whether a company should pay a dividend depends on many factors. Thousands of publicly-traded companies pay dividends to shareholders, and some have maintained long histories of raising their dividends every year.
Companies don’t decide to begin paying a dividend in a vacuum. There are many issues to be considered before returning capital to shareholders with a dividend. Still, many companies pay dividends to shareholders; some have even managed to pay and increase dividends for multiple decades.
For example, the Dividend Aristocrats are a select group of 65 stocks in the S&P 500 that have raised their dividends for 25+ years in a row.
You can download an Excel spreadsheet of all 65 (with metrics that matter such as price-to-earnings ratios and dividend yields) by clicking the link below:
On the other hand, other companies don’t pay a dividend right now, and might not for a very long time (or ever). Companies that are still in the early growth phase of their development often choose to reinvest excess capital back into their business instead of returning it to shareholders. After all, every dollar paid out in dividends is one less dollar available to grow the business.
Netflix (NFLX) is a good example of this, as the company doesn’t currently pay a dividend and hasn’t since it went public in May of 2002. This doesn’t mean that investors should always avoid non-dividend paying stocks. In fact, investors looking more for capital gains than income may want to consider growth stocks like Netflix. Shares of Netflix have generated annualized returns of 7.6% over the past five years. But in the last one-year period, Netflix stock price is down 66%.
Related: Dividend stocks versus growth stocks.
Many tech stocks have initiated dividend payments over the past decade as they have matured and now generate strong profits. Investors could be wondering if Netflix will ever pay a dividend.
With more than 220 million members spread out over more than 190 countries, Netflix is a media giant. While Netflix does offer a wide variety of second-run television programming and movies, the company also produces its own original content.
The company began with humble beginnings, by mailing out DVDs to subscribers. In recent years, its focus has shifted to streaming services over the Internet. Subscribers have access to Netflix’s library of TV series, documentaries, and feature films across nearly every genre imaginable. In addition, the company has spent heavily on creating its own content, which has been critical to Netflix’s success at growing its subscriber base by a high rate. The company also holds the leading share of total US TV time.
Source: Earnings Presentation
This has resulted in huge revenue growth over the years. Netflix’s annual revenue more than tripled from 2016-2021, reaching $29.7 billion last year. Membership growth has decelerated somewhat in recent years. In fact, in the latest quarter, Netflix lost 200,000 subscribers, when it had estimated a 2.5 million subscriber gain. It was the first subscriber loss in a decade. Netflix is estimating a drop of 2 million net subscribers in Q2 2022.
Earnings-per-share grew from $0.43 in 2016, to $11.24 in 2021. Given this growth, investors might think that the company would consider paying a dividend to shareholders, but Netflix has not paid a dividend to date. Part of the explanation for this is that the company is still not consistently profitable. Consensus estimates for 2022 are for earnings of $10.97 per share for Netflix, which represents an earnings yield of 6.4%.
In other words, if Netflix were to distribute virtually all of its annual earnings-per-share, it would generate a 6.4% dividend yield, which of course it would not do because that would deprive the company of cash to invest in growth and debt repayment. Content costs are high, which is a big part of why Netflix does not pay a dividend. But the recent cratering of the share price has made for an impressive earnings yield.
Reasons For Paying A Dividend
Many companies pay dividends as they are an important part of their capital allocation programs. Some companies, such as Dividend Aristocrats like Coca-Cola (KO) and Johnson & Johnson (JNJ), have increased their dividends for several consecutive decades. In fact, both Coca-Cola and J&J are members of the exclusive Dividend Kings list.
Even companies that have been historically reluctant to pay dividends have begun to do so in recent years. This is particularly true among technology companies, which used to spend heavily to grow their businesses but now have started to use dividends as a way to return capital to shareholders. Companies like Apple (AAPL) and Cisco Systems (CSCO) have initiated dividends in the last decade because their shareholder bases demanded a dividend, and their business models generated consistent free cash flow.
It is very understandable as to why these investors would want companies to pay dividends. As stock prices fall in a market downturn, dividends provide a cushion against paper losses. They also allow investors who reinvest dividends to purchase more shares at lower prices and thus increase their overall dividend income. When markets rise again, dividends only add to shareholder returns.
Dividends are also a valuable source of income for retirees. Dividends can help retired investors replace the income they lost when they stopped working. Life’s expenses continue even when people are no longer receiving a paycheck from their employer. For this reason, dividends can be a very important component of a retirement planning strategy.
However, growth companies like Netflix differ from time-tested dividend stocks like Coca-Cola and Johnson & Johnson, in that they still need to spend vast sums of capital on content to grow. This is a necessary expense if Netflix plans to not just maintain but grow its subscriber base in the future.
The company has to compete with rivals in the entertainment industry like Amazon (AMZN), YouTube, Hulu, Warner Bros. Discovery, and The Walt Disney Company (DIS), making it likely that spending rates will only rise from here. Because of this, Netflix may never pay a dividend to shareholders.
Will Netflix Ever Pay A Dividend?
While there are certainly good reasons for paying a dividend, there remain valid reasons for not doing so. Paying a dividend requires cash flow needed to cover payments. Companies that don’t offer consistent free cash flow, like Netflix, would struggle to find cash to return to shareholders on a quarterly basis.
Earnings-per-share are expected to exceed $10 in 2022. While the company technically could pay a dividend based on this, Netflix continues to use its cash flow on growth initiatives in order to increase its pool of subscribers.
Because of this, Netflix has failed to generate positive free cash flow growth on a consistent basis. The company expects to be free cash flow positive this year and beyond, which is an improvement as it is normally typical for Netflix to post negative free cash flow.
Using large amounts of capital also means that Netflix has to access debt markets in order to keep spending. This has impacted the company’s balance sheet, offering yet another obstacle to a future dividend payment. Netflix ended the most recent quarter with $14.5 billion of long-term debt against $6.0 billion of cash and equivalents.
This increase in interest-bearing debt makes it that much more difficult for Netflix to offer shareholders a dividend. Based on all the above, a dividend may not be the right choice for Netflix given its investment spending and debt repayment remain much higher priorities for management.
How a company allocates capital is not set it stone. A capital allocation policy can be changed over time. As a growth business matures, it may decide that paying a dividend is a good use of capital. Once a company reaches consistent profitability, management may decide that a dividend could attract new shareholders as well as reward existing investors.
It is possible that Netflix could eventually make the same decision that Apple, Cisco and others did in terms of a dividend, but it is not likely.
For now, Netflix has many competitors, which means it still needs to use every dollar available to continue to create original content. And with a large amount of debt already on the balance sheet, investors shouldn’t expect to receive dividend payments from the company any time soon.
Netflix may be a compelling growth stock after the large share price losses in the last one-year period, as shares are now trading at 15.4 times forward earnings.
However, the company believes that password sharing, new and growing competitors, sluggish economic growth and increasing inflation are weighing on the business’ growth today.
These growth headwinds, combined with capital requirements and large debt levels, are significant. As a result, it remains unlikely that Netflix will ever pay a dividend.
See the articles below for analysis on whether other stocks that currently don’t pay dividends, will one day pay a dividend: