Since the last decade, Netflix has succeeded in hammering its position as a streaming giant and one of the top dogs in the media and entertainment sectors. The company mainly produces its own content (movies and television shows). Still, it also acquires ownership of other movies and television show content by purchasing ownership or access rights to them. With over 180 million subscribers and a vast library of content, Netflix is indeed its own boss.
From 2015 to 2018, Netflix’s revenue flow increased by an average of 33% yearly, while its earnings per share averaged 120% annual growth making the company a wish come through for almost every investor. According to Forbes, Netflix was worth $194 billion as of the first quarter of 2020, increasing its market value by more than $50 billion as of the first four months of 2020.
Notwithstanding this phenomenal growth, monetary worth, and investment leverage, Netflix doesn’t pay dividends; or at least, it is yet to start paying any dividends. This doesn’t deter investors from still buzzing into the company in huge numbers.
Not paying dividends to its investors, shareholders, and stockholders haven’t hurt Netflix’s share price as the stock price continues to move upward with each passing year. You might wonder the reason why Netflix doesn’t pay dividends; well, you’ll find out shortly.
What is a Dividend?
A dividend can be defined as a distribution of earnings by an organization to its investors. Any profit earned by an organization is usually paid among shareholders and stakeholders as a dividend. A company that earns a surplus or profit can usually pay a certain portion of the surplus to its shareholders as a dividend. Any additional amount not paid as dividends is then put back into the organization to be reinvested in the business.
In order to understand how a dividend works, let’s first take a look at what profit and dividend are. The difference between a profit and a dividend is that a profit will go into the company’s capital stock and will be held as an asset. In contrast, a dividend will go directly to the holders of a company’s stock.
In many cases, a company will distribute any profit earned directly to the shareholders as part of their regular income statement. It is important to keep in mind that this profit will not include any capital that may be paid out as dividends to investors, nor will it include any capital that is received from the sale of company stock.
There are two types of dividends, called long term and short term. Long term dividends are earned when a company earns a profit and pays out a percentage of that profit to the shareholders periodically.
Short term dividends are earned during a specific period of time and paid out only during a specific time. The dividend will be determined according to various factors, such as the company’s profit and the interest rate, the company’s financial standing, the company’s financial obligations to investors, and the investment direction the company is headed.
Why do Companies pay Dividends?
Companies pay dividends to their investors, shareholders, and stakeholders mainly because those people invested in the company. And since those individuals invested in the company/business, they have a right to a certain percentage of the company’s profit in the form of dividends. Paying dividends is an integral part of business financing. So, in order to encourage the shareholders to buy back shares and increase their stake in the company, companies pay a dividend.
Netflix’s Dividend Policy
There has been some confusion recently about why Netflix may not pay a dividend soon. According to a financial analyst, “While Netflix has made it clear they do not anticipate paying any dividends in the foreseeable future, some of their stockholders have requested a change in policy.” It should be noted, however, that no such request is under consideration by the board. The company’s dividend policy has been unchanged for a number of years and is set at one percent of outstanding shares.
Therefore, while it is unlikely that the current dividend policy would be modified in the near future, the future dividend policy may be changed to cushion the effect of a possible decline in its shares price.
Some analysts believe that in order to maintain its long-term position in the market, the best option for a company like Netflix would be to pay dividends and invest in other areas that will provide them with a long-term source of income. This is a good strategy, but only if they do not plan on changing their business model in the near future.
Why Netflix won’t Pay Dividends Now
Investors and even the public are wondering why Netflix is yet to start paying dividends. The first and most obvious answer is that the present economic situation makes prices of stocks for several companies continue to drop. Not wanting to be in a disadvantageous position if their stock were to fall, Netflix is refraining from paying dividends in order to stay financially secure.
The second reason is the price per share/stock price continues to increase. If you want to earn money with this company, you must purchase shares at a price lower than it cost when they were first purchased. To retain its competitive stock edge, Netflix is not yet considering paying dividends.
The third reason why Netflix is not paying dividends now is that it still plans to keep the dividend to finance the enormous number of ongoing and forthcoming projects. Competitors are slowly gaining in on Netflix so, one of its power moves is to keep producing and acquiring top-quality content to serve its millions of subscribers. Money is needed to do this- produce new movies and TV shows, acquire rights to other content, and much more. So, instead of paying out dividends, Netflix is pumping the money back into the company to finance these top-bod projects for higher returns.
Many investors who are looking to increase the value of their stocks will want to work with a company like Netflix because the stock will remain in its growth phase for a number of years. Thus, it makes sense to hold shares in a company that is not currently paying dividends and that is well-positioned to benefit from a stock price increase.