EC Will Netflix Ever Pay A Dividend?

The decision whether a company should pay a dividend is a complex one. Dividends can be a major part of a company’s capital allocation strategy. For example, the Dividend Aristocrats are a group of 53 stocks in the S&P 500 that have raised their dividends for 25+ years in a row.

Other companies do not pay dividends at all, and use cash flow for other purposes, which might include growth investments, acquisitions, debt repayment, or share buybacks. The technology sector includes many stocks that do not pay dividends to shareholders, particularly Internet-based companies.

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 nearly nine-fold from its five-year low price of $40 in October 2013.

Many large technology companies now pay dividends to shareholders, which brings up the question: will Netflix ever pay a dividend?

Business Overview

Netflix is a media giant, with more than 130 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.

NFLX Content

Source: Content Presentation, page 6

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.

NFLX Subscriber

Source: Earnings Presentation, page 2

This has resulted in huge revenue growth over the years. From 2013-2017, Netflix grew revenue by approximately 28% per year. Earnings-per-share have grown at a 48% annual rate in that time, but despite that growth, Netflix still does not pay a dividend.

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Comments

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Zev Bannett 1 month ago Member's comment

While I agree that the above reasoning explains the lack of dividend, it's also important to point out that dividends should logically be paid out when a company cannot reinvest earnings at higher rates of growth. In the case of Netflix, its entire progression defies basic economics, since the stock price does not reflect the economic reality of the company. Netflix is questionably profitable, and has deepening debt. It is true that it shouldn't pay dividends, since it doesn't have earnings to pay out. More to the point, however, is that the valuation of Netflix is way beyond any economic/business justification. It's simply a popular stock, who's share price is driven by popularity, and not by fundamental economics. This makes it a speculation, and a potentially dangerous one.

Moon Kil Woong 1 month ago Contributor's comment

It is easy to see why they don't. They are cash flow negative. they also have a boat load of debt. Also, in a rising interest environment their financing costs go up. If they want to stick around as a viable entity they better not pay dividends.

The last issue is competition. It is heating up and chock full of heavyweights who can burn cash and don't need their services to be profitable for years. This industry is increasingly becoming a game of monetary chicken.

William K. 2 months ago Member's comment

I had wondered about why there were no dividends, so thanks for the clear explanation. and the explanation makes complete sense.