3 Cannabis Stocks for Dividend Investors

Another 4/20 is in the books and year by year the “unofficial holiday” is growing in popularity. In 2021, April 20th saw celebrations from major brands and even the U.S. Senators! 

The rapid growth of cannabis acceptance has been shocking. In less than a decade since Colorado officially legalized recreational marijuana, cannabis and marijuana’s favorability has skyrocketed among the public. 

Last year support for legalized marijuana rose to 68% in a Gallup poll, the highest in the history of the survey.  According to The Washington Post, 36 states currently have legalized marijuana on some level, including 18 that have embraced recreational usage; the latter category includes more than 40% of all Americans. 

Despite increased cannabis legalization at the state level—and, of course, the new revenue stream—the federal government continues to classify marijuana as a Schedule I drug, a stance that feels anachronistic in 2021. 

Reports are that the Biden Administration remains steadfast in its opposition to legalization but is supportive of decriminalization efforts. This puts the president at odds with some in his own party and, increasingly, those on the other side of the aisle.  

The current designation puts growth investors in a tough situation. On one hand, many are reticent to ignore one of the biggest growth industries over the next decade but are worried about legal and regulatory risk. 

However, a less risky way to play the growing legalization of marijuana at state levels is to look to “pick and shovel” stocks that benefit from supplying growers the critical services they need and/or have primary businesses not in the space. 

Here are three stocks that will benefit from increased cannabis acceptance while paying dividends. 

Scotts Miracle-Gro: The dividend is the real Miracle-Gro(wth) story 

  • Scotts Miracle-Gro (NYSE: SMG)
  • Market Cap: $12.8 billion
  • Dividend Yield: 1.1%
  • Stock Price: ${{ price }}

The plants needed for the marijuana industry require a delicate growth process. For this reason, most facilities use hydroponics. While hydroponic growing ensures consistency and faster cultivation times, the process requires significant spending for lighting, nutrients, and hardware. 

Scotts Miracle-Gro created the Hawthorne Gardening company in 2014 to appeal to younger customers living in urban locations. However, the real stroke of genius was the following year when it acquired General Hydroponics Company, a brand popular with cannabis growers. Since then, Scotts Miracle-Gro has nearly become a one-stop shop for all things required for hydroponic cultivation. 

The pandemic has been good for Scotts Miracle-Gro. In fiscal year 2020, total revenue increased 31% over the prior year from a combination of effects including increased lawn care and gardening during social distancing. Its largest division, U.S. Consumer, saw 24% revenue growth due to increased fertilizer, grass seed, and plant food products. 

However, its Hawthorne division was a true growth standout for the second year in a row as revenue attributable to the segment rose 61% and segment operating profit exploded 125% over the prior year. Revenue in this segment is now more than 25% of Scotts Miracle-Gro’s total revenue haul versus 13% two years ago. Simply put, Scotts Miracle-Gro is becoming more of a cannabis play due to revenue growth.

Cannabis investors have taken notice of this pick-and-shovel play, bidding up shares 92% in the last year alone from a combination of earnings beats and as they become more familiar with the long-term opportunity. Still, shares aren’t terribly expensive when compared to the greater market: Scotts Miracle-Gro currently trades hands at 27.5 times forward estimated earnings versus the S&P 500’s valuation of 23.5 times. 

The dividend yield might look unimpressive at only 1.1%, but the dividend growth story is compelling. Last year the company hiked its quarterly payout by 7% and announced a massive special dividend of $5 per share. This is in addition to the massive $750 million share repurchase authorization the company announced earlier that year, an amount currently equal to 6% of its market capitalization.

Scotts Miracle-Gro’s management is looking for ways to return cash to shareholders and the company has a long runway for dividend and stock growth by providing the necessary materials needed for cannabis and marijuana cultivation. 

IIPR: A fast-growing dividend growth REIT 

  • Innovative Industrial Properties (NYSE: IIPR)
  • Market Cap: $4.3 billion
  • Dividend Yield: 2.9%
  • Stock Price: ${{ price }}

At first glance, publicly-traded REIT Innovative Industrial Properties doesn’t seem particularly appealing for income investors. Its 2.9% yield seems low for an asset that requires 90% of taxable income to be paid out in the form of dividends. However, that’s because investors have bid up shares in anticipation of future dividend increases. 

Innovative Industrial Properties operates in a narrow niche, leasing greenhouses and other industrial real estate in the medical marijuana space. Despite partnering with regulated state-licensed cannabis operators, IIPR’s tenants are often constrained by traditional finance companies worried about running afoul of the federal government or a change in state laws. 

IIPR’s sale/leaseback transaction buys existing facilities from growers, giving them immediate access to cash for operations, then leases the facilities back to the growers. 

Niche doesn’t mean low growth. As of year-end, the company had 66 total properties with 5.4 million rentable square feet, an increase of 43% and 76%, respectively, over the prior year. IIPR has been able to negotiate solid deals with growers as the company has a weighted average remaining lease term of 16.6 years with annual base rent escalations. 

Last year the REIT reported a rental revenue increase of 162% and the dividend has exploded from an annualized run rate of $0.60 per share in 2017 to $5.28 as of the most recent payout. 

Like all REITs, investors should prepare for further share issuance as the company is in growth mode. Last year, IIPR reported diluted weighted shares of 19.6 million, nearly double the 10.7 million it reported the prior year, which impacted the company’s diluted EPS (61%) and AFFO per share (53%) annual growth rates. 

In addition to legal and regulatory risk—which is somewhat mitigated by its focus on medical growers—IIPR is richly valued for a REIT as investors are focused on the growth story. Management will need to continue to execute and find strong tenants in a small industry. 

British American Tobacco: A cheap, ultra-yielding stock with cannabis optionality 

  • British American Tobacco PLC (NYSE: BTI)
  • Market Cap: $86.5 billion
  • Dividend Yield: 7.7%
  • Stock Price: ${{ price }}

We’re fans of optionality here at Millennial Money and feel an investment in British American Tobacco (BTI) gives investors access to current dividends and cash flow with the prospect for long-term growth. In March, BTI announced a product collaboration with Canadian cannabis producer OrganiGram. The terms of the deal included BTI taking nearly a 20% stake for approximately $175 million. 

OrganiGram used some of that cash—$22 million in addition to share consideration—to buy The Edibles & Infusions Corporation (EIC), a maker of cannabis-infused edibles. In addition to giving OrganiGram a second operating facility, the acquisition gives OrganiGram a vertically integrated approach to the fast-growing edibles product category. 

Ironically, the biggest risk to British American Tobacco isn’t in the product being illegal in its home country (cannabis is legal in OrganiGram’s home country), but rather in its core business of tobacco. 

The Wall Street Journal recently reported the Biden Administration is considering a one-two punch for cigarette companies. The first is the Food and Drug Administration’s court-mandated April 29 decision whether to ban menthol-flavored cigarettes popular with younger teenage smokers. 

However, it’s the second issue that is considered more problematic for tobacco companies: The Biden Administration is considering requiring that cigarette makers lower nicotine levels to a point they are no longer considered addictive. In the days following this, cigarette stocks have been hammered.

Yet, a little perspective is needed. The federal government’s war on smoking is nothing new. In fact, actions to limit smoking started in the early 1960s and the best performing stock from 1968 to 2017 (including reinvested dividends) according to Wharton professor Jeremy Siegel was Altria Group. This is not a product ban, but only increased regulation, which will likely be litigated and have a phase-in period, if it’s even enacted at all. 

We’re not here to debate the social ramifications of the decision and understand tobacco might not be an ESG-friendly stock. However, investing in cannabis—a product with health impacts still technically illegal at the federal level—may not make many ESG lists either. 

For those unbothered by regulations or its primary product, British American Tobacco is a cheap stock trading at 9 times forward earnings and paying investors a massive yield of 7.7% to wait while it works alongside OrganiGram to grow its cannabis market share. 

Where to invest $500 right now

Are you ready for “maximum upside?”

Motley Fool Rule Breakers is led by legendary investor David Gardner and pinpointed Tesla at $6.29, Salesforce at $6.89, and Shopify at $21.02. (It trades for more than $1,000 per share today!)

Here’s why you’ll want to get the full details on Rule Breakers today. The service just announced its top 10 “best buys now” across the entire stock market. Whether you’re starting with $100, $500, or more, you’ll want to get the full details!

Click here to learn more

Jamal Carnette, CFA owns shares of British American Tobacco. The Motley Fool owns shares of and recommends Innovative Industrial Properties and Scotts Miracle-Gro. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *

In This Article