Why Netflix Won't Start Paying a Dividend in 2019

Netflix (NFLX 0.75%) has given longtime shareholders impressive returns over its illustrious history. Having started out with success simply sending DVDs through the mail, the streaming video giant became a tech pioneer in the entertainment business, and it has reaped the rewards of being a first mover in what is now an industry with explosive growth.

Often, companies the size of Netflix start looking at paying a dividend to reward shareholders further. Yet even though the streaming specialist has seen its earnings soar in recent years, Netflix wants to use that money in other ways that it hopes will produce even better returns for shareholders in the long run.

Stats on Netflix

Data source: Yahoo! Finance.

The argument for Netflix to pay dividends

If you look only at Netflix's net income, the argument for the company at least to start considering a dividend has some appeal. In just three years, the streaming giant's bottom line has jumped almost tenfold, almost tripling in 2017 and more than doubling in 2018. That's finally given Netflix a respectable amount of earnings to consider returning to shareholders through a dividend.

Moreover, those earnings are likely to keep growing at a healthy pace. Investors see Netflix's net income climbing above $4 per share in 2019, with a further jump to $6.67 per share in 2020.

Image source: Netflix.

Admittedly, any dividend Netflix would pay would likely be fairly modest in comparison to its current share price. For instance, even if the company paid its entire 2018 earnings of $2.68 per share as a dividend, it would produce a dividend yield of just 0.8%. More realistically, Netflix would never pay all its net income as dividends, and using a 50% payout ratio, Netflix would barely top the 1% yield mark by 2020 -- and that's assuming the stock goes nowhere over the next year or two.

Why dividends will have to wait

To understand why Netflix isn't going to pay dividends anytime soon, you have to look a bit further into its financial statements. Despite rising profits, Netflix has negative free cash flow -- and even as those earnings have climbed, it's been spending more. Indeed, Netflix has been issuing debt at a rapid rate, including $3 billion in 2017 and nearly $4 billion in 2018.

Where's all that money going? The cash flow statement makes it clear: new content. In 2018 Netflix spent more than $13 billion on additions to its streaming content assets. Net income reflected some of the amortization of those assets, but that wasn't close to enough to offset the cash outflow that went toward investing in content development and acquisition. Moreover, that pace is accelerating, having risen from less than $10 billion in 2017.

Investors disagree on whether that's a smart strategic move. Some fear that Netflix is spending too much in its effort to maintain its lead over up-and-coming competitors in the streaming space, and that the debt it's accumulating will come back to haunt the company. Others point to the improved quality of Netflix's offerings as a key generator of the pricing power that allowed it to boost its subscription prices earlier this month -- and should support further increases in the future.

Don't expect a dividend from Netflix

Entertainment companies have learned from Netflix's success, and they're jumping into the video-streaming industry as quickly as they can. As long as they pose a competitive threat, Netflix isn't going to give cash to shareholders through dividends. Instead it'll keep doubling down on the prospects of its internal business, looking to sustain exponential growth as long as it can. That's bad news for dividend investors, but it's been a winning model for Netflix's share price for a long time.

Check out the latest Netflix earnings call transcript.