There’s no question that this is going to be a big decade for the technology sector. We’re liable to see a demand explosion for cloud computing, cybersecurity, and Internet of Things devices. But don’t sleep on the marijuana industry…
Although Wall Street estimates vary wildly, as we’d expect from an industry with no modern-day precedent, global sales could hit anywhere from $50 billion to $200 billion a year by 2030. For some context here, worldwide legal weed sales didn’t even hit $11 billion in 2018.
But every fast-growing industry encounters growing pains. In Canada, regulatory issues have constrained supply. Meanwhile, in the U.S., high tax rates on legal weed have made it difficult for licensed producers to compete with the black market.
Yet, in spite of these growing pains, two pure-play cannabis stocks have stood out. Though we may have seen a quarterly profit pop up now and then from the marijuana industry, the following two pot stocks have risen head-and-shoulders above the field and become the most profitable marijuana stocks on the planet.
The most profitable pot stock on a per-share basis
Take note that there are a couple of ways to define “most profitable.” It could be the most profitable company on a nominal basis (i.e., actual profit, without dividing into total shares outstanding), or it can be the most profitable on a per-share basis (net income divided by shares outstanding). In terms of the latter, the most profitable marijuana stock is unquestionably Innovative Industrial Properties (NYSE:IIPR).
Innovative Industrial Properties is a cannabis-focused real estate investment trust (REIT). That long stretch of words simply means that IIP, as the company is also known, buys medical marijuana cultivation and processing assets and leases them out for very long periods of time (usually 10 to 20 years). IIP is able to reap the rewards of rental income, while also passing along annual rental increases to outpace the inflation rate. Additionally, IIP collects a property management fee of 1.5% that’s tied to a property’s base rental rate. While much of the company’s growth has been tied to new asset acquisitions, there is a modest organic growth component built in.
The thing to understand about REITs is that they’re a low-cost, high-yield operating model. Although the upfront cost to buy an asset is high, the cost to maintain its existing portfolio is relatively small. Thus, REITs offer very predictable and transparent cash flow, and they avoid normal corporate income-tax rates in exchange for returning most of their earnings to shareholders in the form of a dividend. In IIP’s case its payout has skyrocketed from $0.15 a quarter to $1.17 per quarter over the past three years.
Innovative Industrial Properties’ portfolio currently features 62 properties spanning 16 states, with $844.8 million in capital already committed, and another $245.9 million set aside to reimburse certain tenants for the completion of construction or improvements. The average-weighted lease length of these properties is a cool 16 years. Though IIP no longer reports its average yield on invested capital, it was north of 13% during the first quarter. This would suggest the potential for a complete payback of invested capital within six years.
What all of this means is…
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