By Bhawna
A Dividend refers to a reward or cash. It is given to shareholders of a company. Dividends can be issued in different forms. These different forms are cash payment, stocks, or any other form. A company’s dividend is decided upon by the board of directors. It also requires the approval of shareholders. It is not necessary for a company to pay a dividend. The Dividend is a part of the profit that the company shares with its shareholders. After paying its creditors, a company can use part of the profits to give to the shareholders as dividends. When a company announces that it will give dividends, it fixes a record date. All shareholders who are registered as of that date get a dividend. Some dividends are there in the form of stocks.
Whether or not a company pays a dividend depends on a number of factors. Many publicly-traded companies pay a dividend to shareholders. There are long histories of raising the dividends per year. Companies don’t pay a dividend in a vacuum or without any reason. There are many issues to be considered when paying a dividend. Still, many companies pay a dividend to shareholders. Some even pay and increase dividends for multiple decades.
On the other hand, there are many companies that do not pay a dividend. And the thing is that they might not pay a dividend for a very long time or ever. Companies that are still in their growth phase often reinvest excess capital back into their business instead of returning it to their shareholders.
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Netflix is a good example of this. The company doesn’t pay a dividend and has never done so since it came into existence in May 2002. This doesn’t mean that investors should avoid paying dividends.
Business overview of Netflix
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Netflix has more than 200 million members. These are in more than 190 countries. Netflix is a media giant. Netflix has many second-run television programming and movies.
The company began modestly by mailing out DVDs to its subscribers. In recent years, it has shifted to streaming services over the Internet. Subscribers of Netflix have access to its TV series, web series, documentaries, and feature films in different genres.
In addition, the company has spent a lot on creating its own content. This content has helped Netflix succeed in terms of the high rate of subscribers. The company also holds the leading no. in total US TV share time.
This has resulted in a lot of revenue growth over the years. However, membership growth has decreased in recent years. But in the last year, Netflix has added over a good number of subscribers. Earnings of Netflix have increased in the past year. Taking into account this growth, investors might think that the company should pay a dividend to shareholders. But Netflix has not paid any dividends till now. The explanation behind this is that the company is still not consistently profitable. Content costs are high and this is a big reason why Netflix does not pay a dividend.
Reasons for paying a dividend
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Many companies pay a dividend because they are an important part in their capital allocation. Even companies that did not pay a dividend in the past, have begun to do so in recent years. This is true for technology companies. They have begun to use dividends as a way to return capital to shareholders.
Investors want companies to pay dividends because when the stock market downturns, dividends help against losses. They also allow investors who reinvest dividends in purchasing more shares at lower prices. Thus, their overall dividend income increases. When markets see a rise, dividends add to shareholder returns.
Dividends are also a valuable source of income for those investors who retired. Dividends can help retired investors in a big way. Hence, dividends can be a very important part of the retirement planning strategy.
What are the expectations from Netflix when it comes to paying a dividend?
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There are good reasons to pay a dividend. But on the other hand, there are valid reasons for not doing so too. Paying a dividend needs cash flow. This is needed to cover payments. Companies like Netflix that do not offer consistent cash flow find it difficult to return cash to shareholders on a quarterly basis.
Netflix should technically pay a dividend since it has a large amounts of earnings but Netflix uses its cash flow on growth initiatives. This is required to increase its pool of subscribers.
This is the reason why Netflix has failed to generate positive free cash flow growth on a consistent basis.
Using bigger amounts of capital also has an implication that Netflix has to access debt markets. This is required in order for Netflix to keep spending. This has had an effect on the company’s balance sheet. This is another obstacle to a future dividend payment.
There has been an increase in interest-bearing debt. This makes it much more difficult for Netflix to give shareholders a dividend.
Conclusion
Based on the above-mentioned things, Netflix cannot pay a dividend as there is a lot of investment spending and debt repayment. These are much bigger priorities altogether. A capital allocation program changes over time. As a business matures, it may decide that paying a dividend is important. This is because it is a good use of capital. Once a company reaches a consistent profit range, management may want to pay a dividend. This is for attracting new shareholders as well as existing investors. Netflix will not pay a dividend. It is not likely that Netflix will pay a dividend. Netflix has many competitors in the market which means that it needs to use every dollar to create an original content. And there is also a large amount of debt on the balance sheet already. So, investors should not expect that they will receive dividend payments from the company. Many technology companies have started dividend payments over the past decade. The reason behind this is that they have matured and now are able to generate strong profits. Investors are wondering if Netflix will actually ever pay a dividend.