Netflix (NFLX -0.08%) is often viewed as a growth stock. And like many growth-oriented companies, it has never paid a dividend or considered paying a dividend.
But the reality is that the company isn't growing as quickly as it did. And there's reason to believe it may never get back to the good ol' days of growing revenue by over 200% in five years -- as it did from 2016 through 2021.
Here's why Netflix should consider implementing a dividend and why that move could be great for investors.
Image source: Getty Images.
Pricing pressure
Netflix deserves credit for revolutionizing home entertainment -- first through on-demand DVDs delivered to your door and then through streaming. Unfortunately for Netflix, other companies have come to realize how attractive a subscription-based streaming model is. And that has made the streaming service industry more crowded than ever.
In the past, Netflix generated recurring revenue streams from existing subscribers and fueled its growth by obtaining new subscribers and raising prices. According to data by The Verge, Netflix's January 2022 price bump represents a 40% increase compared to October 2017 for its premium price point and its standard option. Premium is now $19.99 per month and standard is $15.49. Meanwhile, the basic plan is $9.99 per month, representing a 25% increase.
All this is to say that Netflix had already raised prices by a considerable amount before inflation started accelerating, which leaves less room to raise prices later this year or even next year.
The big question looming over Netflix is whether it can get back to a 20% or preferably 30%-plus annual revenue growth rate. Given the fact that Netflix lost subscribers in Q1 after raising prices in January, it does appear that there is a limit to how much Netflix can pressure customers before some of them decide the service is just too expensive.
In many ways, Netflix stock deserved to get torched. Not only has the streaming industry become saturated, but demand for consumers' attention is also high. Netflix isn't just competing with other streaming services -- it's competing with any company whose products and services are used by consumers for entertainment. That includes YouTube (part of Alphabet), video games, sports, and even social media.
Netflix retains and gains subscribers by producing new content that they enjoy. In this vein, it doesn't matter if consumers are watching a rival streaming service or are simply using Meta Platforms' Instagram instead of watching Netflix.
The calculation can all be boiled down to one simple point -- are subscribers watching Netflix more or less? If they are watching Netflix less, for whatever reason, that is bad for the company. The risk going forward is that folks will have more home entertainment options outside of Netflix, which will pressure its ability to gain and retain subscribers and raise prices.
The way out
Given the state of the streaming industry and where it is going from here, it seems that Netflix's domination days are over. Instead of clinging on to what was, I think it's time for Netflix to move on toward its next chapter as a company -- the chapter of moderate growth and strong profitability.
For starters, Netflix could try to reel in its content spending and only produce its best ideas instead of doing what it does now, which is more or less throwing a bunch of shows and movies at the wall and hoping a few of them stick.
Secondly, Netflix could begin to pay a dividend. The company is guiding for $15.9 billion in first-half 2022 revenue and $3.7 billion in operating income. That means it plans to spend $12.2 billion in the first half of this year alone. In 2021, Netflix booked $6.2 billion in operating income off $29.7 billion in revenue, meaning it spent $23.5 billion.
Netflix can easily afford to pay at least $3 billion a year in dividends by cutting its content budget by 15% and only producing its best ideas. That would give Netflix over a 3% dividend yield. As Netflix returns to consistent, positive free cash flow, it can also consider repurchasing some of its stock at discounted levels.
The point here is that there are plenty of ways in which Netflix can reward its shareholders instead of the entire investment thesis hinging on its growth. There are many mature companies with low growth rates that pay dividends. And given that Netflix stock is now at its least expensive valuation in nine years -- with a price-to-sales ratio of just 2.8 and a price-to-earnings ratio of just 17.2 -- it makes sense that the company could consider a dividend and buying back some of its stock.
Where to go from here?
Netflix is part of a long list of growth stocks that were once market darlings and have now seen their share prices cut by 70% or more. In bear markets, fundamentals are put to the test, and valuations compress. Netflix stock is now much more attractive at its lower price. The company has its issues, but it remains one of the most powerful media companies in the world.
If Netflix continues to ramp up spending in a desperate effort to grow its subscribers, it would be a red flag that the company does not understand it is time to shift to a new strategy. If, on the other hand, Netflix reels in spending and considers other options, like an acquisition target such as Spotify or repurchasing stock and paying a dividend, it would bolster the long-term investment thesis for the company.
