Cannabis company CEOs can’t afford a dividend, and I want to tell you why that’s good for your profits…
When you invest in a cannabis stock, you claim your piece of an industry, which is set to grow faster than any other industry has for generations. But don’t expect that claim to come with a dividend.
You see, the more growth prospects a company has, the less likely they are to pay a dividend. A cannabis company looking to make the most of the tremendous revenue growth in front of them is taking all the money they have to invest heavily in their business.
And that investment leaves little room for CEOs to send cash back to shareholders.
Some of that growth will come because the gap between legal and illegal marijuana sales spans hundreds of billions of dollars, and the legalization wave means revenues have to grow incredibly fast to fill it.
But filling the void between existing legal and illegal sales is not the sole driver of growth.
Legalization spurs the emergence of entirely new markets for cannabis products. And these will spring up faster than anyone thought possible.
Toss these new markets into the mix, and before you know it, total legal-market sales could exceed today’s illegal sales by two to three times. Just keeping pace with the soaring demand for cannabis will drive the best companies’ annual revenue growth past 80% for years to come.
Cannabis Growth Means Money Making Choices Galore
I’ve mentioned this before, but cannabis sales approached $350 billion last year, mostly from traditional marijuana, of which only about $20 billion were legal. Tapping into these existing illegal marijuana markets around the globe as they turn legal is just one of the many ways cannabis CEOs can launch profits.
High-growth profits will also come from the emerging medical marijuana market.
Marijuana for medical use is gaining wide acceptance both here and abroad, and public awareness of the powerful treatment possibilities of CBD grows daily. Given all the conditions that THC and CBD can treat, it’s hard to overstate just how big this market could get.
In the U.S. alone, people spent $18 billion on over-the-counter pain medication in 2018. When you add in prescription-based opioid sales, those figures double. On a global basis, sales of pain medication could reach four times that number, and it’s clear that sales of medical marijuana could displace much of that market.
Around the globe, over one billion people suffer from any of the ten key medical conditions for which cannabis is being prescribed as a treatment. The 20% using it therapeutically makes for a market of 200 million patients that didn’t buy marijuana before. And the cost to treat these conditions ranges from a few hundred bucks to tens-of-thousands of dollars.
So, spending an average of $1,000 each year to treat these conditions makes for another $200 billion market, in and of itself.
To this, we can add the potential for patentable cannabinoid-based pharmaceutical drugs. Prescription drugs will make up a $1 trillion market by 2020, and we can expect customized cannabinoid compounds to soon start taking a sizeable chunk out of this profit-rich market.
And don’t forget that I hailed 2019 as the “Year of CBD.” Nutraceuticals, sports medicine, and health and beauty products will demand massive production of CBD. The 2018 Farm Bill and removal of CBD from the Controlled Substances Act has also created tremendous upside for CEOs doing whatever it takes to make the most of the Scale phase.
In addition to all this, the big unknown is – once cannabis becomes legal – how many new buyers can the industry attract. Cannabis-infused edibles, beverages, vapes, and other methods of recreational use could develop into a massive market as marijuana goes mainstream.
Given how quickly things develop in cannabis, we’ll know soon enough – and cannabis company executives know the all-in cannabis market will swell far too big to waste precious capital on dividends.
Preserving Capital to Drive Growth
Now, dividends matter to many investors. Whether they reinvest the money or spend it, the income received forms an important component of how they build their wealth.
But the companies paying dividends don’t do so out of regard for what the investor wants. To them, dividend policy represents a capital planning tool.
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At their core, companies allocate capital. The good ones take the cash provided by investors or earned on their assets and decide how best to invest it.
The decision to pay a dividend comes down to how much return the company’s leadership thinks they can generate by spending the cash on new projects and initiatives. When their cash outgrows profitable opportunities, a responsible company will either buy-back shares or pay dividends.
And whether or not paying a dividend to shareholders makes sense for a company depends a lot on its stage of growth.
Companies just getting off the ground or entering the high growth stage have much different cash needs than the more mature ones.
As you can see in the graph above, early in a company’s life, it burns cash. But profit growth accelerates quickly as sales take off. Only once the market approaches saturation does profit begin to taper as competition squeezes margins. The companies that remain in a mature industry steadily build cash as the opportunities to profit dwindle or become less attractive.
It’s at these later stages that companies begin to pay dividends. Cash proves better off in the hands of investors, and business reinvestment gets focused on efficiency improvement.
For cannabis markets, we’re just entering the high-growth Scale phase. From where cannabis company CEOs sit, they have far too many profit-boosting opportunities staring them in the face to justify a dividend.
And the Microsoft of cannabis provides the perfect example of why you want them to keep their money.
Executive Director, National Institute for Cannabis Investors
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6 responses to “Why We Love the “No Dividend” Policy in Cannabis”
October 10 2019