Will Cannabis Companies Ever Pay Dividends?

Will cannabis companies be able to replicate the success of some of the biggest names in technology and eventually pay a dividend?

| More on:
question marks written reminders tickets

Image source: Getty Images

Canadian cannabis companies have not yet established themselves as consistently profitable companies. The biggest names in the sector have reported net losses for years. However, as the sector expands, some investors may be wondering whether Canadian cannabis companies will ever pay dividends. Let’s take a deeper dive into that question.

What does it take to be a consistent dividend payer?

Some of Canada’s best-known companies have remarkable dividend histories. For example, Royal Bank of Canada (TSX:RY)(NYSE:RY) (“RBC”) has been paying a dividend for over 100 years and is Canada’s largest bank. The bank enjoys consistent profitability due to the relatively concentrated nature of Canada’s banking sector and the diversified range of financial services businesses operating under the RBC banner.

RBC is able to pay consistent and growing dividends for a few reasons. First, the business model is stable because banks make money on interest rate spreads. If rates go up or down, RBC passes on changes to customers. RBC still profits by being able to borrow for less than what the bank charges customers.

Second, RBC operates in a business with steep barriers to entry. Furthermore, it would take tens, if not hundreds, of billions of dollars to build a bank that would be able to compete with RBC.

RBC demonstrates the types of traits that make for reliable dividend payers. Notably, two of these traits are a stable business model that delivers profit in all (or almost all) business environments, and high barriers to entry.

Some cannabis companies in the United States already pay dividends

Strictly speaking, there is no company that directly produces and sells cannabis and currently pays a regular dividend. However, Innovative Industrial Properties (NYSE:IIPR) (“IIP”) is as close as you will come to a dividend-paying cannabis company, at least for now.

IIP is a REIT, in the United States, focussed on cannabis production assets. IIP’s business model involves owning the vital production space that producers operate in and leasing it to producers at contractually-set rates. In many cases, IIP engages in sale-leaseback transactions where the REIT’s client already owns and operates a production facility, and simply wants to lease that space instead of owning it.

IIP buys the property from the client and immediately leases the space back to that same client, allowing producers to free up huge amounts of capital tied to production facilities with no business interruption.

This business model is stable. The rents that producers pay are contractually set, and thus IIP enjoys predictable and recurring cash flows. While the barriers to entry are not necessarily as high as they are for banks, it is not cheap to continuously be acquiring new industrial properties.

Additionally, REITs are required to pay out 90% of income to shareholders in the form of dividends. These factors allow IIP to pay a generous dividend.

Production and brand development are not cheap

Companies such as Canopy Growth (TSX:WEED)(NYSE:CGC) have certain unique expenses that companies like IIP do not. For example, Canopy actually has to produce cannabis. This costs money, especially given that Canopy has a large indoor-cultivation footprint.

Second, Canopy has to brand and market products. There is a huge financial risk that comes with carrying inventory of specific strains or products. If that strain or product does not sell, it not only means potential markdowns on prices, but also that Canopy is not generating cash flow very quickly.

Additionally, developing brands, advertising, and paying royalties to third party collaborators all eat into profit margins as well.

Ultimately, Canopy is likely a decade or more away from paying a dividend if the company ever does. Canopy has significant costs that must be budgeted for because these costs play a vital role in revenue and profit growth. In the end, Canopy is better suited for growth investors.

Takeaway

Some companies in the cannabis space will eventually pay a dividend. However, don’t focus exclusively on the dividend. Focus on profitable business models with high barriers to entry. Stock price gains, and often dividends, will follow.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Innovative Industrial Properties. Fool contributor Kyle Walton owns shares of Innovative Industrial Properties.

More on Bank Stocks

woman data analyze
Bank Stocks

Best Stocks to Buy in May 2024: TSX Financials Sector

Wondering which TSX financial stocks could see substantial growth in the future? Here are three stocks with BIG upside from…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

2 Canadian Bank Stocks to Watch in May 2024 (They’re Not the Big 5)

Watch National Bank of Canada (TSX:NA) and another top financial closely in May.

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

How Much Will Toronto-Dominion Bank Pay in Dividends This Year?

This long-term dividend payer could deliver double-digit returns going forward.

Read more »

risk/reward
Dividend Stocks

1 Dividend Stock Down 20% to Buy Right Now

Bank of Nova Scotia is a good income stock that's fairly valued and can deliver solid long-term returns.

Read more »

stock research, analyze data
Bank Stocks

Is Royal Bank of Canada Stock a Buy in 2024?

RBC (TSX:RY) stock looks strong heading into second-quarter earnings, so let's look at what's been happening with the biggest bank.

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Banking on Dividends: 2 Top TSX Bank Stocks With Attractive Yields

These two high-yield TSX bank stocks can help you earn reliable passive income for years to come.

Read more »

thinking
Bank Stocks

Is it Too Late to Buy Royal Bank of Canada Stock?

Royal Bank of Canada (TSX:RY) stock is getting hot again, but is it too late to chase this banking beast?

Read more »

Man data analyze
Bank Stocks

1 Bank Stock to Buy Hand Over Fist and 1 to Avoid

Not all Canadian bank stocks fit the bill if you are looking for a healthy combination of growth and dividends.

Read more »