Marijuana stocks have become exceedingly popular, but not everyone feels comfortable investing directly in the companies that produce and grow cannabis. Instead, some prefer to look at the companies that are in the business of helping marijuana producers maximize their growth business. Scotts Miracle-Gro (NYSE:SMG) provides fertilizers and equipment that individual and commercial operations can use to boost cannabis production, while Innovative Industrial Properties (NYSE:IIPR) is a real estate investment trust designed to help cannabis companies find the space they need while meeting all the regulatory requirements surrounding marijuana production facilities.
For marijuana investors, a diversified approach can be smart, but you still want only the top marijuana stocks in your portfolio. Below, we'll look into whether Scotts Miracle-Gro or Innovative Industrial Properties is more deserving of a spot in your cannabis portfolio.
Valuation and stock performance
Scotts Miracle-Gro and Innovative Industrial Properties have seen their shares move in opposite directions lately. Scotts is down more than 35% over the past year, but Innovative Industrial has soared a whopping 112% since January 2018.
Using traditional earnings-based valuation measures is a bit difficult in comparing these two companies, in part because of extraordinary items that have affect companies' bottom lines and in part because of their different business models. Scotts has a high trailing earnings multiple that exceeds 60, but on a forward-looking basis, the fertilizer company's valuation falls to less than 15 times forward earnings. Meanwhile, Innovative Industrial's bottom line gets affected by a number of real-estate specific factors that balloon its multiples beyond what's reasonable. Yet when you look at fund flows from operations -- a better metric for REITs -- the valuation looks a lot more reasonable. With hard assets on its balance sheet, Innovative Industrial looks like the smarter pick on a valuation basis.
It's not all that common to find stocks in the cannabis space that pay dividends, but both Innovative Industrial and Scotts do. Right now, Scotts has a slight lead in yield at 3.2%, but Innovative Industrial's 2.5% dividend yield is respectable.
When it comes to dividend growth, though, Innovative Industrial has had an edge recently. Scotts has done a good job in providing regular dividend increases, with annual boosts coming every year since 2010. But over the past several years, those boosts have been less than 10%, including a rise of just 4% in 2018. By contrast, Innovative Industrial has a much shorter history, but it's already taken its initial dividend payout of $0.15 per share on a quarterly basis and increased it to $0.35 per share. Given how the yield has kept up with the dramatic rise in its share price, Innovative Industrial's dividend performance is exemplary.
Growth prospects and risks
Both Scotts and Innovative Industrial have worked to flesh out their growth opportunities. For Scotts, it's important to remember that cannabis represents only a portion of its overall business, as its Hawthorne division's sales of hydroponics, lighting, and other cultivation equipment have seen considerable volatility. In fiscal 2018, Hawthorne represented less than 15% of total revenue for Scotts, and a modest operating loss stood in stark contrast to the $497 million operating profit in Scotts' traditional consumer products business. No matter how successful Hawthorne might turn out to be, investors in Scotts also have to be comfortable with exposure to products like Ortho weed and insect control, Roundup weed killer, Tomcat rodent-control products, and the namesake Scotts and Miracle-Gro fertilizer and nutrients. That diversification cuts both ways, though, as it could protect Scotts from a marijuana implosion but hold it back if purer-play marijuana stocks take off.
Meanwhile, the growth prospects for Innovative Industrial are clear. As more cannabis cultivators begin operations, the demand for real estate that's suitable for their needs goes up. But most upstart companies don't have the capital to afford a major real estate commitment, and that's where Innovative Industrial comes in. Already, the REIT's portfolio of assets has grown dramatically, and a more-than-150% rise in revenue in its most recent quarter compared to year-earlier figures led to a greater-than-250% jump in adjusted funds from operations. The REIT structure also ensures that investors participate in Innovative Industrial's success through rising dividends. With the passage of the farm bill and the prospects for greater U.S. investment in cannabis-related operations, Innovative Industrial has the wind at its back in attracting good tenants.
Go with the momentum
Despite its huge share-price run-up, Innovative Industrial still looks like the better marijuana stock buy compared to Scotts Miracle-Gro. For those investors who are convinced that cannabis has the most potential for growth, there's no substitute for the pure-play exposure that Innovative Industrial provides -- along with the plentiful dividend income that's only likely to grow over time.