By Bob Ciura
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?
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.
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.
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.
One reason for Netflix’s lack of a dividend is that the company is not highly profitable. Netflix had earnings-per-share of $1.25 per share in 2017, for a low earnings yield of approximately 0.35%. Netflix has very high content costs, which explains its low earnings yield and lack of a dividend.
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 2017 annual report, the company generated earnings-per-share of $1.25. This was its highest annual earnings-per-share recorded over the past five years. While the company theoretically could pay a dividend, it chooses not to, instead preferring to reinvest all of its earnings back into the business.
Netflix has generated negative free cash flow in each of the past five years, with accelerating negative cash flow in that time. In 2013, the company recorded negative free cash flow of $16.3 million; in 2017, Netflix was free cash flow negative to the tune of $2.1 billion. This means the company must continue to raise capital—primarily through selling shares and raising debt—to continue funding growth initiatives.
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 is never set in stone. It is possible that Netflix one day will pay a dividend. If the company successfully vanquishes competitors and becomes highly profitable, the company could choose to pay a dividend at that point.
However, that seems to be years away, if ever. Until then, Netflix management appears content to use all available cash to reinvest in the business. The company has plowed billions of dollars into producing original content, which will most likely continue to be its biggest strategic priority for many years.
There are reasons to invest in Netflix, including its growth rate, but a dividend is not one of them. Netflix stock could continue to richly reward shareholders, as it has for the past several years, but risk-averse investors looking for dividend income should look elsewhere.