There are many ways for companies to allocate capital, which includes growth investments via either capital expenditures or acquisitions, and which also includes shareholder returns via either dividend payments or share repurchases.

Income-oriented investors, such as those seeking a dividend stream for their retirement, naturally tend to favor the companies with a capital allocation policy that suits their needs, such as the Dividend Aristocrats, which are committed to raise their dividends over time.

Netflix (NFLX), one of the most famous, high-growth tech stocks, has so far not made any dividend payments to its owners. Instead, the company is focused on maintaining a high growth pace, especially through the international expansion of its business.

In this article, we will look at the likelihood of Netflix paying a dividend in the foreseeable future.  

Company Overview

Netflix originally started by renting out DVDs, but has successfully changed its business model towards online streaming of movies, series, and other forms of filmed entertainment. The company also produces its own content, investments in this segment have continued to grow at a rapid pace over the last couple of years.

Netflix operates in 190 countries and has more than 150 million paying subscribers, making it a leader in the streamed entertainment industry. Netflix does not put advertising into its content, which is in line with the practice of competitors such as HBO.

Netflix was founded in 1997 and is headquartered in Los Gatos, CA. The company has a market capitalization of $136 billion.

Netflix: Focused on Growth

In order to become solid dividend-paying companies, companies must generate sufficient free cash flows on a consistent basis, as otherwise, dividends have to be financed by debt, which is not sustainable in the long run.

Netflix does, so far, not generate positive free cash flows. The company reported a negative free cash flow of $3 billion for fiscal 2018, even though 2018 had been the most profitable year Netflix has ever had. Netflix’ growth focus means that the company has to invest heavily into original content in order to keep existing customers while also convincing new, potential customers to start subscriptions. Content creation is costly, and so far Netflix’ operating cash flows do not cover the company’s growth investments.

Upcoming competition from Disney, AT&T, and others, which all plan to introduce their own streaming services in the near future, means that Netflix cannot slow down its spending on original content if the company wants to remain competitive. Investments into content production will likely even increase further, as Netflix will lose access to content owned by others, such as Disney’s content, which the company will make accessible via its own streaming service in the future.

It is thus likely that Netflix’ capital expenditures will continue to rise, which means that even though its subscriber numbers and revenues continue to grow, positive free cash flows are not to be expected over the next couple of years.

Netflix also has more than $10 billion in long-term debt on its balance sheet, which reduces Netflix’ ability to introduce dividend payments even further. 

Final Thoughts

Netflix has been a strong growth investment in the past, its stock has risen tremendously over the last couple of years. Netflix has not made dividend payments so far, though, and it is unlikely that investors will get any dividend payments in the foreseeable future.

Netflix does not generate positive free cash flows, due to its heavy spending on original content, and that will likely not change over the coming years. Competitive pressures, plans for more international growth, and Netflix’ considerable debt load will, we believe, soak up Netflix’ rising operating cash flows for the next couple of years. Investors that are oriented towards dividend income should, therefore, avoid Netflix for the foreseeable future.