Updated on July 1st, 2019 by Nate Parsh
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.
For example, the Dividend Aristocrats are a group of 57 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 57 (with metrics that matter) by clicking the link below:
Still, many companies do not currently pay a dividend, and never have. For example, companies in the growth stage of their development typically do not pay dividends to shareholders, instead preferring to use all available cash flow for growth investment. The technology sector in particular holds many stocks that do not pay dividends to shareholders.
Netflix (NFLX) does not currently pay a dividend, and never has as a public company. That does not necessarily mean non-dividend paying stocks are a bad investment. Far from it—Netflix stock has increased more than nine-fold from its six-year low price of $40 in October 2013.
Many large technology companies now pay dividends to shareholders, which raises the question: will Netflix ever pay a dividend?
Netflix is a media giant, with nearly 149 million memberships in over 190 countries around the world. Netflix offers a wide variety of second-run television shows and movies, and also produces its own original content.
The company started out as a DVD-by-mail provider, but in recent years has shifted to streaming content over the Internet.
Netflix subscribers get access to a huge library of TV series, documentaries, and feature films across a wide variety of genres. Netflix has invested heavily in curating and producing the best content, which has been crucial to its massive subscriber growth in recent years.
Source: Earnings Presentation
This has resulted in huge revenue growth over the years. From 2015-2018, Netflix grew revenue by approximately 33% per year. Earnings-per-share have grown at an average rate of 120% during this time, but despite that growth, Netflix still does not pay a dividend.
One reason for Netflix’s lack of a dividend is that the company is not highly profitable. Netflix had earnings-per-share of $2.68 per share in 2018, for a low earnings yield of approximately 0.1%. Netflix has very high content costs, which explains its low earnings yield and lack of a dividend.
Reasons For Paying A Dividend
Dividends are an important part of many companies’ capital allocation programs. Some companies, such as Dividend Aristocrats like 3M (MMM) and Altria (MO), have raised their dividends for several decades running. A few companies such as General Mills (GIS) have paid dividends to shareholders for over 100 years.
Even companies that were very reluctant to pay dividends have joined in the dividend parade. Shareholders of traditionally non-dividend paying sectors, such as technology, have embraced dividends as part of their capital allocation programs. Companies such as Apple (AAPL) and Cisco Systems (CSCO) have initiated dividends over the past decade, due in large part to rising shareholder demands for them.
It is easy to see why many investors want companies to pay dividends. When stock prices are declining, due to a recession or period of geopolitical conflict, dividends provide a cushion against falling stock prices. And when the markets are rising, dividends only add to shareholder returns. Dividends provide income that is especially valuable for retirees.
For income investors such as retirees, dividends can help replace lost income from no longer working. Even though retirees are no longer receiving a paycheck from employment, they still have many of life’s expenses to pay for. That is why dividend stocks can be such a valuable component of a retirement planning strategy.
But growth stocks like Netflix are much different than dividend stocks like 3M and Altria. Netflix still has to spend huge amounts of capital on content, which is a necessary expense to retain subscribers and continue to grow its subscriber base.
In 2018, Netflix spent $13 billion on additions to its streaming content assets. This was a 33% increase from 2017. It is likely that Netflix could always have high content costs, as the company operates in a highly competitive space and will always have to fight for subscribers. There are many rival streaming services trying to lure customers away from one another, which casts doubt on whether Netflix will ever pay a dividend to shareholders.
Will Netflix Ever Pay A Dividend?
While there are many good reasons for paying a dividend, there are also valid reasons not to. Ultimately, in order for a company to pay a dividend to shareholders, it has to generate the necessary cash flow to do so. Companies that are not consistently profitable, such as Netflix, simply do not have the profitability to return cash to shareholders.
According to Netflix’s 2018 annual report, the company generated earnings-per-share of $2.68. This was its highest annual earnings-per-share recorded over the past five years. While the company theoretically could pay a dividend based on this, it continues to utilize cash flow to reinvest in growth initiatives such as content.
Netflix has generated negative free cash flow in each of the past six years, with accelerating negative cash flow in that time. In 2013, the company recorded negative free cash flow of $16.3 million; in 2018, Netflix was free cash flow negative to the tune of $3 billion. Netflix expects to produce a free cash flow deficit of approximately $3.5 billion in 2019.
Burning through such large amounts of cash requires Netflix to raise capital to continue investing aggressively in growth. This has taken a toll on the company’s balance sheet, an additional challenge to paying a dividend down the road. Netflix ended the 2019 first quarter with $10.3 billion of long-term debt, compared with $3.35 billion of cash and cash equivalents.
Such a large amount of interest-bearing debt reduces Netflix’s ability to pay a dividend to shareholders. Clearly, a dividend is simply not on the map for Netflix management, perhaps rightfully so. Netflix stock has massively outperformed the broader market in the past several years.
A company’s capital allocation strategy can change over time. A dividend payment can become more likely as a business develops and enters maturity. Once it reaches a state of strong profitability, and possibly reduced future growth opportunities, a management team could decide that a return of cash to shareholders is appropriate.
While it is possible that Netflix one day will pay a dividend, it is not likely. If the company successfully vanquishes competitors and becomes massively profitable, the company could choose to pay a dividend at that point. But as content costs will continue to bear on Netflix, with a large amount of debt on the balance sheet, investors should not expect a dividend payment any time soon.
There are many good reasons to invest in Netflix. It has been one of the most highly-rewarding growth stocks of the past decade. Netflix stock could continue to generate strong stock price appreciation in the years ahead, as it revolutionizes the streaming media industry, income investors looking for dividend income should look elsewhere.