At first glance, Innovative Industrial Properties (IIP) (IIPR -0.17%) looks like a promising stock to buy. Near its 52-week low, it's possibly a cheap buy. With an average analyst price target of more than $126, the stock could potentially soar by more than 75% over the next year or so.
But the optimism shouldn't be nearly that high for the cannabis stock. It's likely analysts will trim their price targets in the near future.
Pot industry challenges
The cannabis industry continues to struggle to compete with the black market. And although pot was always a challenging industry, given the quasi-legal environment with states permitting cannabis use while the federal ban on it remained intact, rising inflation has only put more pressure on marijuana businesses.
It's become so bad, that many companies are scaling back their operations or exiting some markets entirely. For Innovative Industrial Properties, a real estate investment trust (REIT) that relies on sale-and-leaseback agreements with marijuana producers, this heightens the risk for the stock because its tenants may be unable to pay rent, which could threaten the safety of its dividend.
Price targets could come down for IIP
Given the gloomy outlook for the cannabis industry, investors should anticipate more price downgrades for IIP's stock. And analysts have been putting out lower price targets recently to reflect the higher level of risk:
Data source: MarketBeat. Chart by author.
For now, the analyst price targets remain high, due to earlier projections. But as analysts update their price targets, the consensus target will likely decline. The last time shares of IIP traded at more than $100 was back in January, and with cannabis companies not performing any better since then, it's hard to imagine a scenario where bullishness will return to the industry anytime soon.
Without a catalyst to save this struggling industry, investors should expect to see more lackluster earnings reports from cannabis companies. And as that happens, more downgrades should follow for the companies themselves, as well as IIP, whose business depends heavily on the strength of marijuana producers.
Is the stock still a buy for the dividend?
What investors might find attractive is the stock's dividend yield, which now sits at more than 10%. A big part of the reason for the high yield is that IIP's stock has fallen 45% in the past 12 months, so investors are collecting a high dividend for a much lower price.
But at that high yield, investors should be asking questions about whether the payout is sustainable. For the three-month period ended March 31, the company's funds from operations (FFO) per share totaled $2.04, which was 10% higher than the $1.86 FFO per share that the company reported in the prior-year period.
The yield looks safe for the time being, but the danger is that multiple tenants have defaulted and the risk is real for the REIT that things may get worse as the year goes on. While IIP continues to pay a high-yielding dividend for now, investors should be careful not to assume that it will remain the case for the long term.
A dividend cut is a very real and serious concern that investors need to consider. The safest approach for investors is to wait and see how the year goes before buying the stock.
