Up to date on December sixteenth, 2022 by Nate Parsh
Whether or not an organization ought to pay a dividend is determined by many components. 1000’s of publicly-traded corporations pay dividends to shareholders, and a few have maintained lengthy histories of elevating their dividends yearly.
Corporations don’t resolve to start paying a dividend in a vacuum. There are lots of points to be thought of earlier than returning capital to shareholders with a dividend. Nonetheless, many corporations pay dividends to shareholders; some have even managed to pay and improve dividends for many years.
For instance, the Dividend Aristocrats are a choose group of 65 shares within the S&P 500 which have raised their dividends for 25+ years in a row.
You possibly can obtain an Excel spreadsheet of all 65 (with metrics that matter, resembling price-to-earnings ratios and dividend yields) by clicking the hyperlink beneath:
However, different corporations don’t pay a dividend proper now and may not for a really very long time (or ever). Corporations which can be nonetheless within the early progress part of their growth typically select to reinvest extra capital again into their enterprise as a substitute of returning it to shareholders. In spite of everything, each greenback paid out in dividends is one much less greenback obtainable to develop the enterprise.
Netflix (NFLX) is a superb instance of this, as the corporate doesn’t presently pay a dividend and hasn’t because it went public in Might of 2002. This doesn’t imply that buyers ought to at all times keep away from non-dividend-paying shares.
Associated: Dividend shares versus progress shares.
Many tech shares have initiated dividend funds over the previous decade as they’ve matured and now generate robust income. Traders may very well be questioning if Netflix will ever pay a dividend.
Enterprise Overview
With greater than 223 million members unfold out over practically 200 nations, Netflix is a media big. Whereas Netflix does provide all kinds of second-run tv programming and flicks, the corporate additionally produces its personal unique content material.
The corporate started with humble beginnings by mailing out DVDs to subscribers. Lately, its focus has shifted to streaming providers over the web. Subscribers have entry to Netflix’s library of TV collection, documentaries, and have movies throughout practically each style possible.
As well as, the corporate has spent closely on creating its personal content material, which was crucial to Netflix’s success at rising its subscriber base by a excessive price. The corporate additionally holds the main share of complete U.S. TV time.
Within the fall of 2022, Netflix customers posted 221.47 billion minutes of viewing, the tops within the U.S. The corporate accounted for 7.6% of video viewing, which is 2.6x instances that of Amazon and 1.4x that of Disney+ Hulu, and Hulu Reside. In different nations, such because the U.Okay., Netflix holds an excellent bigger share of video viewing.
This resulted in large income progress through the years. Netflix’s annual income greater than tripled from 2016 to2021, reaching $29.7 billion final 12 months. Membership progress has decelerated considerably in recent times, however that modified throughout the newest quarter.
Supply: Q3 Earnings Presentation
Within the third quarter, world streaming paid memberships elevated 4.5% to only over 223 million whereas world streaming paid web additions totaled 2.4 million. The corporate expects so as to add much more customers, as a lot as 4.5 million, within the fourth quarter of 2022 as a consequence of in style unique programming. The addition of a lower cost ad-supported streaming possibility is predicted to have extra of a cloth influence subsequent 12 months.
Earnings per share grew from $0.43 in 2016, to $11.24 in 2021. The vast majority of Netflix’s friends are comparatively new to streaming and are nonetheless constructing out their platforms. In consequence, heavy spending is predicted because the business tries to catch as much as Netflix, which has resulted in a lot of the competitors not but being worthwhile. Netflix, however, is worthwhile as the corporate generates between $5 and $6 billion of annual income.
Given this progress, buyers may suppose that the corporate would think about paying a dividend to shareholders, however Netflix has not paid a dividend up to now. A part of this rationalization is that the corporate remains to be not constantly worthwhile because it may very well be. Consensus estimates for 2022 are for earnings of $10.29 per share for Netflix, representing an earnings yield of three.3%.
In different phrases, if Netflix had been to distribute nearly all of its annual earnings-per-share, it could generate a 3.3% dividend yield, which after all, it could not do as a result of that will deprive the corporate of money to put money into progress and debt compensation. Content material prices are excessive, which is an enormous a part of why Netflix doesn’t pay dividends.
Causes For Paying A Dividend
Many corporations pay dividends as they’re an essential a part of their capital allocation packages. Some corporations, resembling Dividend Aristocrats like Coca-Cola (KO) and Johnson & Johnson (JNJ), have elevated their dividends for a number of consecutive a long time. The truth is, each Coca-Cola and J&J are members of the unique Dividend Kings checklist.
Even corporations which were traditionally reluctant to pay dividends have begun to take action in recent times. That is notably true amongst know-how corporations, which used to spend closely to develop their companies however now have began to make use of dividends as a solution to return capital to shareholders. Corporations like Apple (AAPL) and Cisco Programs (CSCO) have initiated dividends within the final decade as a result of their shareholder bases demanded a dividend, and their enterprise fashions generated constant free money move.
It is vitally comprehensible why these buyers would need corporations to pay dividends. As inventory costs fall in a market downturn, dividends present a cushion in opposition to paper losses. Additionally they enable buyers who reinvest dividends to buy extra shares at decrease costs, thus growing their total dividend earnings. When markets rise once more, dividends solely add to shareholder returns.
Dividends are additionally a priceless supply of earnings for retirees. Dividends can assist retired buyers change the earnings they misplaced once they have stopped working. Life’s bills proceed even when folks now not obtain a paycheck from their employer. Because of this, dividends could be a essential part of a retirement planning technique.
Nevertheless, progress corporations like Netflix differ from time-tested dividend shares like Coca-Cola and Johnson & Johnson as a result of they nonetheless must spend huge quantities of capital on content material to develop. This can be a mandatory expense if Netflix plans to not simply preserve however develop its subscriber base sooner or later.
The corporate has to compete with rivals within the leisure business like Amazon (AMZN), YouTube, Hulu, Warner Bros. Discovery, and The Walt Disney Firm (DIS), making it possible that spending charges will solely rise from right here. Due to this, Netflix might by no means pay a dividend to shareholders.
Will Netflix Ever Pay A Dividend?
Whereas there are actually good causes for paying a dividend, there stay legitimate causes for not doing so. Paying a dividend requires the money move wanted to cowl funds. Corporations that don’t provide constant free money move, like Netflix, would battle to seek out the money to return to shareholders on a quarterly foundation.
Earnings per share are anticipated to exceed $10 in 2022. Whereas the corporate technically might pay a dividend primarily based on this, Netflix continues to make use of its money move on progress initiatives to extend its pool of subscribers.
Due to this, Netflix has did not generate constructive free money move progress on a constant foundation. The corporate expects to be free money move constructive this 12 months and past, which is an enchancment because it often is typical for Netflix to submit unfavourable free money move.
Utilizing giant quantities of capital additionally implies that Netflix has to entry debt markets in an effort to hold spending. This has impacted the corporate’s stability sheet, providing one other impediment to a future dividend fee. Netflix ended the newest quarter with $14 billion of long-term debt in opposition to $6.1 billion of money and equivalents.
This interest-bearing debt makes it rather more troublesome for Netflix to supply shareholders a dividend. Based mostly on all of the above, a dividend might not be the suitable alternative for Netflix, given its funding spending and debt compensation stay a lot increased priorities for administration.
Ultimate Ideas
How an organization allocates capital just isn’t set in stone. A capital allocation coverage could be modified over time. As a progress enterprise matures, it might resolve that paying a dividend is an effective use of capital. As soon as an organization reaches constant profitability, administration might resolve {that a} dividend might entice new shareholders and reward current buyers.
It’s attainable that Netflix might finally make the identical resolution that Apple, Cisco, and others did by way of a dividend, however it’s not possible.
For now, Netflix has many opponents, which suggests it nonetheless wants to make use of each greenback obtainable to proceed to create unique content material. And with a considerable amount of debt already on the stability sheet, buyers shouldn’t anticipate to obtain dividend funds from the corporate any time quickly.
For all these causes, it stays unlikely that Netflix can pay a dividend within the subsequent a number of years.
See the articles beneath for an evaluation of whether or not different shares that presently don’t pay dividends will someday pay a dividend:
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