The word for the cannabis industry of late has been this: unstoppable. Not only in Canada, but in the U.S. as well.
Marijuana may be illegal under federal law in the U.S., but, it is gaining a legal presence on state levels, now totaling twenty-nine where medical marijuana is legal. A study conducted by ArcView and BDS Analytics reported legal sales growth predictions in North America to be an average of 28% annually between now and 2021, ending in estimated yearly sales of $24.5 billion.
Some marijuana stocks investors are looking for dividend income to pad investments in high-growth stocks.
The pace at which marijuana stocks are growing is unquestionable. Over the past two years, most of the biggest weed stocks according to market cap are turning out tripled and quadrupled gains. The thing is, purchasing high-growth stocks is not something with which all investors are comfortable. Some investors are more comfortable when their stocks with potential for long-term appreciation can be padded with dividend income.
The question then becomes this: Is it realistic to expect marijuana stocks to eventually pay dividends? The answer to this is, perhaps, surprisingly complex.
The question of whether or not marijuana stocks will ever pay a regular dividend to shareholders involves a number of complex moving parts.
While a simple “yes” or “no” response to the question of marijuana stock dividends ever being likely would be nice, the truth is a number of variables figure into this determination. However, for this to occur, four things can be deemed necessary with relative certainty.
1. The costs of growing cannabis would need to decrease drastically before seeing marijuana stocks dividends.
For starters, the price of growing cannabis per-gram would need to be in steep decline in order for weed stocks to pay a regular dividend. The good news is that Canada’s largest growers have demonstrated that this is possible. It remains to be seen if this trend can hold up sustainably as legalized recreational pot is expected to substantially increase production demands.
Aurora Cannabis (NASDAQOTH:ACBFF), one of the expected top three growers, serves as an example: Currently, the company is delivering a mere fraction of the annual 240,000 to 270,000 kg of marijuana it could produce. Its growing cost per gram in Q2 this fiscal year was $1.36. Aurora’s investor presentation in January hinted that this cost could be reduced below $0.78 per gram given the higher production yields anticipated from its two key facilities – Aurora Sky and Aurora Nordic in Denmark.
While this doesn’t promise anything regarding Aurora’s marijuana stocks paying dividends in the near future, it does provide a clear example of a model for declining cost that may foreshadow sustainable business.
2. Marijuana stock dividends require harmony between supply and demand.
Dividend generation is predicated upon a balance struck between supply and demand. So, what is the current state of supply and demand in the legal cannabis industry?
Figuring in Canada’s impending legalization of recreational weed this summer and the preemptive expansion we’ve seen from the country’s seven dozen licensed growers, the industry could generate an estimated 1.5 million to 2 million kilograms of dried cannabis annually by 2020. The problem arises from early estimates of Canada’s annual demand, which figure in much lower at roughly 800,000 kg. To state the obvious: a marijuana glut is a real possibility, at least initially. Foreign exports to countries with legal MMJ markets may help absorb some of this excess, but, exact figures are unknown at this point.
Since Canada will be the first developed country to legalize recreational marijuana, there is no example to turn to for examination of historic-use. This unfortunately leaves investors in the relatively dangerous position of flying blind, decreasing the likelihood of seeing a marijuana stock dividend until supply and demand have stabilized, potentially in a few years.
3. For marijuana stocks to generate dividends, more countries need to legalize cannabis use.
Even a few more countries legalizing marijuana for adult use will assist in the kind of growth needed for dividend generation. As of now, parts of Europe and a few countries beyond that have made medical marijuana legally accessible for select purposes. Yet recreational marijuana really holds the key to industry growth.
It is highly questionable whether weed stocks could pay a dividend if things remain as they are, with the majority of demand coming from a handful of countries. Shareholders can begin to talk about the possibility of being paid dividends once growers have been able to geographically diversify their stream of revenue.
4. Weed stocks dividends may come to investors with the maturing of businesses and dwindling of reinvestments.
The trend right now is for marijuana stocks to raise capital quickly and they’re accomplishing this through reinvestment of their operating cash flow. In doing so, companies are hoping to claim more of the market share once Canada gives the green light to recreational weed; they also view this use of capital as they’re best option at this point. However, as marijuana companies and the industry mature, reinvesting in growing facilities will no longer be their best use of capital. It is at this point of maturation that profitable marijuana stocks may find it worthwhile to pay shareholders a regular dividend, quarterly or annually.
In closing, investors should not expect a dividend any time soon in the cannabis industry. Some analysts might estimate a minimum of four or five years before marijuana stocks would be remotely ready to consider a regular dividend, given the time needed for legalization to spread geographically and to gain a clearer understanding of supply and demand.
(For more information on marijuana growers, read Growing Like Weeds: The Top 5 Marijuana Stocks Producers.)