Deciding to pay a dividend isn’t something companies should take lightly. The decision to do so depends on many different factors. Companies must be profitable and have robust free cash flow in order to fund their dividends.
Some of our favorite dividend payers belong to in the Dividend Aristocrats index. The dividend Aristocrats are an exclusive group of stocks that have paid and increased their dividends for at least 25 years and are part of the S&P 500. There are only 57 such stocks in this dividend index.
Other companies choose not to pay a dividend. Companies that are still growing need to use all available cash flow to fund future growth. Using capital to pay dividends might provide some income for shareholders, but it could come at the expense of growth.
One company that has not yet paid a dividend is Netflix (NFLX, Financial). Not paying a dividend hasn’t hurt Netflix’s share price as the stock has climbed more than nine-fold over the past six years.
Other technology names, such as Apple (AAPL) and Microsoft (MSFT), began paying a dividend once they have achieved quite a bit of growth. But investors hoping for a Netflix dividend are likely to be disappointed.
Business Overview
With almost 150 million subscribers in more than 190 countries, Netflix has become a worldwide leader in the media and entertainment sector. The company produces its own content while also providing second-run television shows and movies.
Netflix began its existence mailing out DVDs to subscribers, but now streams its programming through the internet. This has allowed subscribers to access a vast library of content from a click of a button. This has made it easier for the company to amass a large subscriber base.
From 2015 to 2018, Netflix’s revenue increased by an average of 33% year while earnings per share averaged 120% annual growth. Yet, the company still doesn’t pay a dividend.
That is because Netflix spends large amounts of cash on content each year in order to help grow the business.
Reason for paying a dividend
Part of the reason that companies pay shareholders a dividend is because dividends are an integral part of the company’s capital return programs. Investors in these companies hold shares for long periods of time because they know that, more likely than not, they are going to see their dividends increased every year. That expectation demands a commitment from companies to continue to do just that.
If the company were to stop increasing its dividend or, worse, cut it, then many shareholders would seek to sell their positions. This would likely cause the stock to decrease dramatically.
Many companies in the technology sector do not pay dividends because they need that capital to grow. Eventually, however, these companies, like Cisco Systems (CSCO), often begin initiating dividends because they have started to realize some of their growth potential and become more profitable. When this happens, shareholders start to demand a return of excess capital, which often comes in the form of dividends.
Dividends act as a natural ballast during a recession period where stock prices are falling. While dividends rarely ever completely offset a drop in share price, the income provides some relief for shareholders. This is especially true if shareholders choose to reinvest those dividends into a lower share price.
But Netflix is a growth company and in a much different phase of its business. Netflix needs all available capital to keep producing new content.
Last year alone, Netflix spent $13 billion on content, which was an increase of 33% from the previous year. Netflix might have to start relaying more on its original content as other providers pull its programming from the company. NBC is taking “The Office” back from Netflix in 2021 while Warner Media will be bringing “Friends” to HBO Max next spring. Both shows are among the most watch programming on Netflix.
In addition, there are many rival streaming services, such as Hulu and the upcoming launch of Disney+ in November, that compete with Netflix for subscribers.
It is very likely that Netflix will have to spend more on original content in the years to come in order to grow its subscriber base.
What are the odds of a Netflix dividend?
While there are valid reasons for paying a dividend, there are also reasons for a company not pay one. In order to pay (and raise) its dividend, a company must produce the appropriate amount of cash flow to do so. Companies that spend much of their cash flow, like Netflix does, are not likely to be in a position for return capital shareholders.
In 2018, Netflix earned $2.68 per share, the highest annual earnings-per-share in the past five years. An increase in profitability could, in theory, lead to a dividend, but Netflix continues to reinvest into its content.
Netflix hasn’t posted a positive free cash flow in the past six years. In fact, the negative cash flow has accelerated during this period of time. In 2013, Netflix had negative free cash flow of just $16.3 million. Fast forward to 2018, the company’s negative free cash flow was more than $3 billion. The company expects negative free cash flow of $3.5 billion for the current year.
Netflix has also had to increase its debt in order to reinvest in its business and now has a debt position of $10.3 billion against $3.35 billion of cash and cash equivalents on its balance sheet. Such a high net debt position makes paying a dividend even more challenging.
Adding it all up, we feel that Netflix is highly unlikely to pay a dividend anytime soon in the near future.
Final Thoughts
While some companies eventually are in a position to initiate a dividend, we feel that Netflix is not a candidate for doing so. The company is ramping up spending and carries a lot of debt on its balance sheet.
The business isn’t yet highly profitable and the company is burning through cash in order to fend off challengers and to replace the second-run programming that it will be losing in the very near future.
There are some good reasons for investing in Netflix as the company has spearheaded the change in how consumers watch television. But if you’re investing in Netflix in hopes of one day receiving a dividend, you will likely be disappointed.
Disclosure: No positions in any stocks mentioned.Ă‚
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