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Netflix: Buy for Growth, Not for Income

Netflix: Buy for Growth, Not for Income
Juan Moyano - Dreamstime.com

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Friday, 19 July 2019 12:48 PM Current | Bio | Archive

Netflix, Inc. (NFLX) has been one of the great growth stocks of all time. The company revolutionized an industry, and now dominates the streaming media space. While its recent earnings report caused the stock to fall ~10% on weak subscriber numbers, Netflix has still hugely rewarded investors over the past decade.

Netflix still has many growth opportunities available, both in new geographic regions as well as in original content. However, investors hoping for a Netflix dividend at some point in the future are likely to be disappointed.

Recent Earnings Report Spooks Investors

On July 17th, Netflix reported disappointing quarterly financial results. Revenue increased 26% for the quarter, or 33% excluding currency, to $4.9 billion. Average revenue-per-user increased 3%, or a 9% increase excluding foreign exchange. Earnings-per-share of $0.60 beat analyst expectations, by $0.04 per share.

Of greater concern for investors is that Netflix delivered a big miss on subscriber numbers. Netflix added 2.7 million subscribers, far below the ~5 million analysts had expected. It was also well below the 5.5 million subscriber adds from the same quarter a year ago. Netflix ended the quarter with nearly 152 million global paid memberships, representing 22% year-over-year growth.

One factor that could have contributed to Netflix’s weak subscriber growth was its recent price increase. Netflix noted that subscriber additions were particularly affected in regions in which prices were raised. In addition, the streaming space has become increasingly competitive, with multiple television networks unveiling their own streaming platforms in recent months.

Netflix continues to invest significant amounts of money in creating its own content to provide a differentiated platform, taking on billions in debt. But the good news for investors is that the company has finally reached consistent profitability. Looking ahead, Netflix expects current-quarter EPS of $1.04. In theory, Netflix could pay a dividend now that the company generates positive EPS. However, with such high investment demands, it is unlikely Netflix shareholders will see a dividend over the next several years.

Press Pause On A Netflix Dividend

In order for a company to pay a dividend, it must have the ability and the willingness to do so. Just because a company reaches profitability, does not automatically guarantee a dividend payout. Many large-cap stocks with strong profits still do not pay a dividend, such as Facebook (FB) and Alphabet (GOOG).

And in the case of Netflix, while it no longer generates massive losses, it is not nearly profitable enough to provide a compelling dividend payout, even if it had the will to distribute cash to shareholders. For example, analysts currently expect Netflix to generate EPS of $3.35 for 2019. Netflix could distribute a portion of this for a shareholder dividend.

If Netflix were to pay out $2 per share as an example, it would represent a dividend payout ratio of approximately 60%. But the dividend yield would be less than 1%, a fairly unimpressive yield that likely would not convince income investors to buy the stock.

While Netflix is profitable, it is not profitable enough to provide a compelling dividend. As a result, even though there are good reasons to buy Netflix stock—specifically its growth prospects—investors should not expect a dividend any time soon.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Netflix continues to invest significant amounts of money in creating its own content to provide a differentiated platform, taking on billions in debt. But the good news for investors is that the company has finally reached consistent profitability.
netflix, buy, growth, income
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2019-48-19
Friday, 19 July 2019 12:48 PM
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