Canopy Growth Corp. (TSX:CGC) is currently focused on scaling up its business as fast as possible, but the company could evolve into a respectable dividend payer in the coming years.
Let’s take a look at Canada’s top cannabis producer to see how things might pan out.
Canopy is already a leader in the growing medical marijuana market in Canada, and it’s extending its reach through partnerships and acquisitions.
The pending takeover of Mettrum Health Corp. will cement Canopy’s position as the dominant player in Canada, as the two companies currently control about half of the domestic medical marijuana market.
Mettrum also comes with two national brands and important production capability.
In order to accelerate the production ramp-up as efficiently as possible, Canopy has entered an agreement with real estate developer the Goldman Group. The deal is structured so that Goldman will acquire or construct suitable properties and outfit the facilities to Canopy’s proprietary specifications. Canopy will then lease the sites from Goldman.
Overseas, Canopy recently acquired a German pharmaceutical distributor.
The recreational market
Canopy’s stock has soared in the past year on investor hopes that Canada will open a recreational marijuana market in 2018.
The government received an initial report from its task force at the end of November and is expected to table legislation in the spring of 2017.
Assuming all goes according to plan, investors could see Canopy supplying marijuana to recreational users some time next year.
Estimations of the market potential vary, but most analysts say the industry could be worth $5-10 billion per year.
As the existing market leader with the largest brand recognition, Canopy is positioned well to capture a good chunk of that market.
Canopy is unlikely to declare a dividend in the near term. The company is still focused on ramping up its production capacity and isn’t even profitable.
However, once the market matures and Canopy has reached the scale it needs to meet demand, there is a good chance this company could become a dividend star similar to the tobacco companies. For example, Philip Morris pays a dividend with a 4.5% yield.
Should you buy Canopy?
Management is making all the right moves at this point in the game, but the road to a legal recreational cannabis market might not be a smooth as investors think, and any sign of a delay could potentially hit this stock hard.
At $10 per share and a market valuation of $1.2 billion, Canopy is currently priced for perfection, so there is good reason to be cautious.
As a result, investors searching for potential dividend kings should probably consider other options until the recreational marijuana market is actually up and running.
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Fool contributor Andrew Walker has no position in any stocks mentioned.