Other corporations, on the other hand, may not pay a dividend for a long time (or ever). Entrepreneurial firms generally choose to keep their capital invested in the business rather than distribute it to shareholders. In the end, every dollar paid out in dividends is a dollar that can’t be used to expand the company.
A excellent example of this is Netflix (NFLX), which has not paid a dividend since it went public in May 2002. Non-dividend-paying equities aren’t always bad investments, but they aren’t the only ones. Netflix, for example, is a great option for investors who are looking for long-term returns rather than short-term dividends. Over the previous five years, Netflix shares have returned an annualized 43 percent, which is a massive return for investors.
Over the past decade, many tech stocks have started paying dividends as they have matured and started generating substantial profits. As a result, investors may ask if Netflix would ever pay out an annual dividend to shareholders.
Business Overview
Netflix is a media behemoth with more than 200 million subscribers in more than 190 countries. Despite the fact that Netflix provides a vast range of already aired television shows and films, the firm also creates original material.
As a start-up, the company began by mailing DVDs to customers. In recent years, the company has changed its focus to Internet streaming services. With Netflix, you can watch a wide variety of TV shows, documentaries, and feature films from all around the world. To further its success in building its subscriber base at a rapid rate, Netflix has invested extensively in its own original content.
As a result, the company’s revenue has grown tremendously. During the period from 2016 through 2020, Netflix’s annual revenue nearly tripled, reaching $25 billion in 2017. But this is to be expected after such an extended period of outsized rise in the number of members.
In 2016, earnings per share were $0.43; in 2020, they will be $6.08. Because of this, investors may assume that Netflix might contemplate paying out a dividend, although the firm has not done so to far. This could be explained in part by the fact that the company has yet to achieve significant profitability. Netflix is expected to earn $10.38 per share in earnings in 2021, according to consensus projections, a yield of just 1.8%.
For a 1.8 percent dividend return, the corporation would have to pay out nearly all of its yearly earnings-per-share, which it will not do because it would deprive the company of capital for investment in growth and debt repayment. Since Netflix’s content costs are so expensive, the company’s profits yield is low and it does not pay a dividend.
Reasons For Paying A Dividend
It is not uncommon for corporations to issue dividends as part of their capital allocation strategy. Several firms, such as Coca-Cola and Johnson & Johnson, are known as “Dividend Aristocrats” because they have consistently raised their dividends over the course of several decades. Both Coca-Cola and Johnson & Johnson are members of the Dividend Kings list.
Dividends are now being paid by even corporations who were previously unwilling to do so. When it comes to technology companies, this is especially true. Rather than investing substantially to expand their operations, these firms are instead returning capital to shareholders through dividends. To satisfy their shareholders’ demand for a dividend, companies like Apple (AAPL) and Cisco Systems (CSCO) have started paying dividends in the previous decade.
It’s easy to see why these investors seek dividends from firms. Dividends act as a safety net in times of market turmoil since stock values plummet and dividends are paid out. Dividend reinvestment allows investors to boost their total dividend income by purchasing additional shares at reduced prices. Returns for shareholders only increase when the stock market rises again.
For retirees, dividends are an important source of income. It is possible for retiring investors to recoup some of their lost income through dividends. Even if an individual no longer receives a salary from their employment, they must nonetheless cover their basic living needs. Because of this, dividends can be a crucial part of a retirement strategy.
While dividend stocks like Coca-Cola and Johnson & Johnson have been around for decades, growth businesses like Netflix, which need to spend a lot of money on content in order to grow, are not. Netflix will have to spend this money if it wants to keep and even expand its customer base in the future.
Amazon (AMZN), YouTube (GOOG), Hulu, and The Walt Disney Company (DIS) are just some of the entertainment industry’s competitors, so it’s probable that spending will continue to climb. Netflix may never pay a dividend to shareholders as a result of this.
Will Netflix Ever Pay A Dividend?
There are many strong reasons to pay a dividend, but there are also many good reasons not to. Profits must be available to meet the cost of paying a dividend. Companies like Netflix, which don’t generate a steady stream of free cash flow, will have a difficult time generating the kind of quarterly dividends that can be returned to shareholders.
At this point in time, analysts predict EPS to be greater than $10. While Netflix could theoretically pay a dividend based on this, the firm continues to spend its cash flow on growth projects in order to expand its subscriber base.
Due of this, Netflix’s free cash flow growth has been negative. For the first time in Netflix’s history, the business plans to produce a positive free cash flow for the year.
Debt markets are also necessary for Netflix’s spending because of the company’s huge capital expenditures. Due to this, a future dividend payment has been put on hold due to the impact on the company’s balance sheet. Netflix has $14.9 billion in long-term debt at the conclusion of the most recent quarter, compared to $7.7 billion in cash and equivalents.
Netflix’s ability to pay shareholders a dividend has been hampered by this increase in interest-bearing debt. Netflix’s investment spending and debt repayment are more important to management than a dividend, so a dividend may not be the best option for the company.
Final Thoughts
A company’s capital allocation strategy is not fixed. In the long run, capital allocation policies can be modified. Paying a dividend may become an option for a company as it matures. Once a company has established a track record of profitability, the management may decide that paying a dividend is a good way to both reward existing shareholders and attract new ones.
However, it is possible that Netflix will make the same decision that Apple, Cisco, and others made in terms of dividends, but it is not likely to happen.
As of today, Netflix has a lot of competition, so it has to spend all of its money on original programming. Furthermore, given the company’s high level of debt, investors shouldn’t hold out hope for any dividend payments in the near future.
However, there are other reasons to see Netflix as a viable investment. Subscribers and revenue are increasing for the corporation as its streaming service continues to achieve worldwide acclaim. These are some of the reasons Netflix may remain a lucrative growth stock in the future. Netflix, however, is unlikely to ever pay a dividend because of its high capital requirements and high debt levels.
Other stocks that don’t now pay dividends can be found in the following articles:
How much dividend does Netflix pay per share?
During the three months ending in September 2021, Netflix paid $0.00 in dividends per share. Its trailing twelve-month (TTM) dividends per share terminated in September 2021 at $0.00.
Does Google pay a dividend?
Companies in the IT sector frequently distribute profits to shareholders in the form of stock dividends or regular cash payouts. Despite pressure from investors and industry experts, Google’s parent firm, Alphabet (GOOGL), isn’t one of them.
Does Tesla pay a dividend?
Tesla’s common stock has never been paid a dividend. Therefore, we do not expect to distribute any cash dividends in the near future because we aim to keep all future earnings to fund further expansion.
What is Coca Cola dividend?
For than a century, Coca-Cola has been providing people with a refreshing beverage. With a focus on restaurants, cinemas, and theme parks, the company makes and sells its drinks around the world. Strategy worked against us during the coronavirus epidemic, but is currently working in our favor.
In addition to the dividend of $0.42 per share, Coca-Cola provides a dividend yield of 3.07 percent. Dividend payout ratio, or the percentage of profits distributed as dividends, has risen to more than 100% in recent years. Because eventually the company runs out of cash, a dividend payout ratio of more than 100% is unsustainable.
Does Starbucks dividend?
Is Starbucks a dividend-paying company? Definitely, Starbucks pays its shareholders in the form of a dividend, and the current quarterly rate is 41 cents per share of Common Stock.
Does Nike stock pay dividends?
A global leader in sportswear, apparel, and footwear, Nike (NKE) is a major stock market symbol. Nike had a market valuation of $112 billion as of November 1st, 2019.
In 1964, Blue Ribbon Sports became the forerunner to Nike, which was formally established in 1971. This brand has grown from obscurity to global renown since its inception with just $1,200 in its bank account.
Because of this, it’s now active in places like the U.S. and Canada as well as parts of Europe and Asia (Japan and China included). It is on track to join the ranks of S&P 500 dividend aristocrats thanks to its rising earnings and blue-chip status. An S&P 500 dividend aristocrat must have increased its dividend for a minimum of 25 consecutive years and must be included in the S&P 500 Index to qualify for this distinction.
