The hazy future of cannabis stocks in the U.S. is clearing, since the Trump Administration issued an Executive Order on Dec. 18 instructing the Attorney General to change marijuana from a Schedule 1 drug to Schedule 3. In the short term, there is still tons of red tape before any schedule change becomes legally effective. And even then, it is not the same as federally legalizing marijuana.
Ultimately, this policy change would mean Internal Revenue Code 280E would no longer apply to cannabis businesses, meaning they could deduct business expenses such as payroll and benefits, rent and facilities costs, marketing and advertising, and other overhead expenses. The bottom line: this change would make cannabis businesses more profitable.
There are other catalysts smoldering, too. Pennsylvania and Florida, two of the larger medical-use sales states, are nearing adult-use sales, as are Virginia and Minnesota, while other limited medical marijuana and adult-use states are expanding their programs. The two public companies ready to benefit most are the rare ones that are already turning a profit, notably, Green Thumb Industries (GTBIF 0.85%) and NewLake Capital Partners (NLCP +0.65%).
Proven growth in an unpredictable sector
Green Thumb sells packaged cannabis products and owns 108 RISE Dispensaries across 14 states. It is on track for its eighth consecutive year of revenue growth since its founding.
OTC: GTBIF
Key Data Points
In the third quarter, Green Thumb reported revenue of $291 million, up 1.6%, year over year. The company earns money from its dispensaries and from consumer packaged goods, which it sells to other cannabis companies. While retail sales were down 1% compared to the same period a year earlier, prepackaged sales jumped 8%, mainly from additional sales in New York and Ohio. Earnings per share (EPS) were $0.10, up from EPS of $0.04 in the third quarter of 2024.
The company's brands give it a strong presence and ensure it isn't reliant solely on in-house sales. The company's biggest weakness is one that is shared by most cannabis companies: slim margins, though it is more profitable than the rest of the major cannabis pure plays. Its shares are more than 3.5% over the past year.
Dividend growth in a greenhouse and dispensary real estate play
NewLake is a real estate investment trust (REIT) that focuses on owning and leasing properties to cannabis companies. The New Canaan, Conn., company specializes in triple-net leases, which put most costs on the renters. NewLake has an average remaining weighted lease term of 12.3 years from its tenants, which means consistent cash flow. It owns 34 properties, including 15 cultivation properties and 19 dispensaries, across 12 states.
OTC: NLCP
Key Data Points
One of the big attractions of REITs is their above-average dividends. They are required to pay shareholders at least 90% of their taxable income as dividends.
NewLake has increased its dividend by 79% since its initial public offering in 2021. The current yield on its quarterly dividend is 11.47%. A dividend yield that high, while attractive, might be cause for concern, but NewLake's adjusted funds from operation (AFFO) payout ratio is 82%, well within the safety guidelines for a REIT. By contrast, its main competitor, Innovative Industrial Properties (NYSE: IIPR), had an AFFO payout ratio of 90% in the third quarter.
One concern about NewLake is that, while it has 12 different tenants, 24.1% of its properties are leased by Curaleaf (CURLF +0.00%), which means NewLake is exposed if Curaleaf has financial difficulties.
NewLake reported third-quarter revenue of $12.6 million, up 0.3% year over year. It also has low debt levels, giving it the opportunity to grow. It has $8 million in debt but more than $24 million in cash. It saw AFFO per share rise 2% year over year to $0.52. AFFO per share is a better metric than EPS for a REIT for measuring profitability because it provides a more accurate picture of a REIT's cash flow and ability to pay dividends. AFFO includes capital expenditures for maintaining a property, while net income does not.
Two wildly different ways to invest in cannabis stocks
Green Thumb International is more of a pure-play cannabis company, directly involved in growing and selling marijuana. If the drug is rescheduled, it may have more to gain from that change, compared to a cannabis-adjacent company such as NewLake. However, it is important to remember that the rescheduling is not yet a sure thing.
NewLake, on the other hand, may be a better short-term stock. It has fallen about 8% over the past year, but if you include its dividends, the drop on its total return is less than 1%. The company also stands to gain if cannabis stocks see higher margins, because its tenants become less risky. Its high dividend also allows investors to be a little more patient for a turnaround in the cannabis industry.
