Since starting as a small DVD rental service in 1998, Netflix (NFLX) has morphed into one of the world’s biggest media companies. It’s now worth over $147 billion, with a stock price above $330. That’s not bad, considering shares were selling for a dollar when Netflix made its IPO just two decades ago.
Given the company’s size and status in the public consciousness, it’s no surprise that many people look to it as a potential addition to their investment portfolios. However, intelligent investors seeking passive income and a cushion against paper losses first ask, “Does Netflix pay dividends?” Read on to discover the answer, the reasons behind it, and whether the future holds something different.
Does Netflix Pay Dividends?
No, Netflix does not pay dividends. Although it has 232.5 million paid subscribers, generates profits of around $5 billion a year, and is officially the 78th most valuable company in the world, Netflix doesn’t issue cash payments to shareholders – and hasn’t done since going public in May 2002. Despite the frustration this causes in some circles, there are viable reasons behind the company’s decision.
Why Doesn’t Netflix Pay Dividends?
First and foremost, Netflix is a growth company. So, similar to other well-known organizations that don’t pay dividends, such as Amazon, Google, and Tesla, it reinvests profits into the business to fund development and stay competitive.
The amount of money Netflix devotes to growth is enormous, forking out almost $17 billion a year on creating content and over $2.5 billion on marketing last year. If the company paid dividends instead, it would have a weaker financial position. Moreover, it’d make maintaining market share harder than it already is. More on this later.
Aside from its commitment to growth, though, Netflix also struggles to remain as consistently profitable as possible. For example, despite generating $31.6 billion in revenue in 2022, its net income fell by 12.2% from the previous year to $4.4 billion. That level of fluctuation and the impact on the cash flow it represents makes committing to a quarterly dividend payment difficult.
Finally, Netflix has borrowed heavily from debt markets to help fund its content production and growth. For instance, as of March 31, 2023, its total long-term interest-bearing debt stood at $14.038 billion. According to the same source, that’s a 3.42% decline YOY. Yet despite this drop – and Netflix’s $5.2 billion cash holdings – its debt poses a significant barrier to future dividend payments.
Netflix Struggles Could Prompt Change
Despite Netflix’s ongoing popularity, the company faces various challenges that threaten to inhibit growth. Chief among them is competition. Since Netflix first realized the potential of a subscription-based streaming service, a host of similar services have hit the scene and crowded the market.
According to Similar Web, while Netflix remains the biggest streaming platform in the United States, its market share continues to fall. It dropped to 44.21% in the first quarter of this year – a sizable 5.56% decrease from its position in the first quarter of 2022. By comparison, the market share of competitors like Hulu, YouTube TV, and Paramount+ increased.
In addition, Netflix decided to raise its prices again in January last year. Its Premium and Standard plans now cost $19.99 and $15.49 per month, respectively, over 60% more expensive than in 2015. In addition, the Basic plan now sets subscribers back $9.99, a 25% jump from 2015.
This is important because prices rose before inflation caused too much trouble. In essence, Netflix backed itself into a corner where it now can’t justify another price increase for fear of losing subscribers. And because that’s happening simultaneously with the company’s losing market share, it’s hard to see how it’ll maintain the growth it needs. Indeed, these challenges help explain why Netflix stock (NFLX) has fallen from its November 2021 high of $691.69 to what it is today.
Could Dividends Be the Answer?
Given its downward trajectory, there’s some speculation that Netflix’s days as a growth company are drawing to a close. Will it start rewarding investors in other ways, such as paying dividends?
While it remains conjecture now, it isn’t unfeasible. After all, even if Netflix reduced its content budget by 10% to 15%, it could free up billions of dollars to use for this purpose. And, given that its stock is as cheap as it’s been for almost a decade, now’s an opportune time to do it. With renewed positive cash flow, the company could buy back some of its stock at a discount.
Is It Time to Buy Netflix?
So, does Netflix pay dividends? Unfortunately, no. But that doesn’t mean you shouldn’t invest in it! Not only is Netflix one of the biggest media companies on the planet that’s proved its commitment to growth, but it’s currently trading at a relative bargain compared to past valuation. Furthermore, if those who believe Netflix may start paying dividends soon are correct, then now might be a lucrative time to buy.
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