Why Marijuana Stocks Won't Pay a Dividend, Even if They're Profitable

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There aren't too many industries that can grow at 20%-plus a year over the next five years, but marijuana could be one of them. Cannabis research firm ArcView believes the legal North American pot industry could be worth $21.6 billion by 2021, which would translate to a 26% compound annual growth rate. With growth like this, and the industry slowly but surely maturing a bit, it's becoming increasingly harder to overlook marijuana stocks as just a fad.

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The biggest near-term catalysts for pot stocks continue to be expansion opportunities and changing public opinion. Back in 1979, CBS News found that just 27% of the people it interviewed in its survey wanted pot to be legal nationally. Comparatively, 61% were in favor of such a move as of April 2017. Within the U.S. at least, the more favorable a view the public has of cannabis, the more likely it is that lawmakers in Washington will consider altering its scheduling. After all, if lawmakers choose to ignore the will of the people, they could risk losing their elected seats on Capitol Hill.

Three reasons marijuana stocks won't pay a dividend anytime soon

While marijuana stocks seemingly have it all at the moment, one thing they're very unlikely to do at any point in the near or intermediate future is pay a dividend to their shareholders -- and there are three very good reasons why.

1. Most aren't profitable

To begin with, most marijuana stocks aren't profitable at the moment, which pretty much takes the idea of returning capital to shareholders off the table. For instance, GW Pharmaceuticals (NASDAQ: GWPH) is the largest marijuana stock by market cap by a mile, but it's not expected to be profitable for at least another couple of years. Its lead drug, Epidiolex, an oral cannabidiol-based drug designed to treat two rare types of childhood-onset epilepsy, dazzled in multiple phase 3 studies, but will still need a green light from the Food and Drug Administration in 2018 before GW Pharmaceuticals will have any meaningful recurring revenue. 

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2. The weed industry is capital intensive

The second factor to consider is that the marijuana industry is capital intensive. In other words, at least for the time being, practically all cash flow is being utilized to expand capacity for cannabis growers and retailers, and for research and development purposes for cannabinoid-based drug developers. This strategy makes perfect sense with the U.S. seeing a steady increase in legalizations for both medical and recreational weed, Mexico legalizing medical cannabis in June of this year, and Canada tinkering with the idea of green-lighting recreational pot by July 1, 2018.

In Canada, for example, Aphria (NASDAQOTH: APHQF) is spending more than $100 million on its Phase IV expansion project, which will boost its growing capacity to approximately 1 million square feet, and allow it to produce 100,000 kilograms of dried cannabis a year. The Canadian medical marijuana market has been growing rapidly, and Aphria has benefited from being among a small group of pot producers that's been cleared to export dried cannabis to foreign countries that have legalized medical weed. Recreational approval in Canada would simply be icing on the cake.

3. Restrictive laws discourage shareholder returns

The third reason it's very unlikely marijuana stocks will pay a dividend relates to laws that put these companies at a distinct disadvantage to "normal" businesses. For instance, within the U.S. there are two distinct disadvantages to operating as a marijuana-based company. To start with, there's virtually no access to basic banking services, which reduces the ability of businesses to gain access to capital to rapidly expand. The other issue is that weed-based companies are unable to take normal corporate income-tax deductions. This saddles U.S. marijuana companies with paying tax on their gross profits (should they be profitable) as opposed to net profits.

One more thing...

It's probably also worth driving home the fact that marijuana is illegal throughout North America at the moment. Yes, eight states have legalized within the United States, and Canada is currently looking at legislation that would clear the way for legal adult-use pot by next year. But right now, this is an illicit drug throughout North America. That means the business model could come crashing down at any moment.

Within the U.S., Attorney General Jeff Sessions hasn't been shy about his contempt for the marijuana industry. Known as an ardent opponent of cannabis prior to being named Attorney General, Sessions in May requested that some of his colleagues repeal the Rohrabacher-Farr Amendment, which currently protects medical marijuana businesses in legal states from federal prosecution. In other words, Sessions is itching for a fight with the marijuana industry, and the legal expenses and potential of tighter regulations on a still illicit drug make dividends an unrealistic idea for pot stocks.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.