Constellation Brands, Inc.: Is STZ Stock a Marijuana Income Play?

Constellation Brands, Inc.: Is STZ Stock a Marijuana Income Play?
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If You Are Worried About the Risk in Marijuana Stocks, Read This

There’s no other way to put it: Marijuana stocks are expensive. Even after their tumble in the fourth quarter of 2018, valuations are still bloated.

The blunt reality is, a lot of cannabis companies are focusing on expanding their business and have yet to turn a profit. But growth rates are hard to predict and are rarely consistent, making it difficult to determine how much a weed stock is really worth.

But if investors are willing to diversify away from marijuana pure-plays, there are other stocks that can give them exposure to this volatile industry.

In particular, I’m looking at Constellation Brands, Inc. (NYSE:STZ).

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If you’ve been following this company, you’d know that Constellation Brands is not exactly a marijuana stock. Instead, it is a producer and marketer of beer, wine, and spirits headquartered in Victor, New York.

The company has quite a few well-known brands in the alcoholic beverage industry, such as “Corona,” “Modelo Especial,” “Modelo Negra,” and “Pacifico.” It has operations in the U.S., Mexico, Canada, New Zealand, and Italy.

So why did I throw the word “marijuana” in the headline of an article about a wine and beer maker?

Well, because while Constellation Brands is best known as an alcohol beverage company, it also has a sizable stake in one of the biggest marijuana companies in the world—Canopy Growth Corp (NYSE:CGC).

You see, back in August 2018, Constellation Brands announced that it would invest $4.0 billion in Canopy Growth. The news sparked a rally in CGC stock as well as many other marijuana stocks. The investment was completed later in the year and gave Constellation Brands approximately 37% ownership of Canopy Growth. (Source: “Constellation Brands’ $5 Billion CAD ($4 Billion USD) Investment in Canopy Growth Closes Following Shareholder and Canadian Government Approval,” Canopy Growth Corp, November 1, 2018.)

Gaining Exposure to the Cannabis Industry

To give you an idea how big Canopy Growth is, here are some numbers.

In the most recent quarter, Canopy Growth sold 2,197 kilograms of marijuana and generated $23.3 million in revenue. Notably, the top line number represented a 33% improvement from a year ago. Furthermore, the company had 84,400 registered patients for the quarter, marking a 34% increase year-over-year. (Source: “Canopy Growth Corporation Reports Second Quarter Fiscal 2019 Financial Results,” Canopy Growth Corp, November 14, 2018.)

In other words, Canopy Growth is well-established in the marijuana industry and is growing at a rapid pace.

This makes STZ stock a very interesting opportunity. On one hand, Constellation Brands has a solid business producing beer and wine. On the other, it has a substantial stake in a booming marijuana business.

It’s safe to say that when an investor buys STZ stock, they are also getting some exposure to the cannabis industry.

What’s even more unique about STZ stock is that it also pays a dividend. Constellation Brands stock has a quarterly dividend rate of $0.74 per share, which translates to an annual yield of 1.85%.

Note that this $0.74 per share is the company’s cash payment to shareholders. Whether Constellation Brands stock goes up or not, shareholders always get a dividend check in the mail every three months.

That is, this marijuana stock—while not one in the traditional sense—actually offers investors a way to get paid with certainty.

This is extremely rare in the cannabis industry because most marijuana companies are investing every dollar they have in expanding their business, leaving little resource for a dividend policy.

Also, since STZ initiated its regular dividend program in April 2015, its quarterly dividend rate has more than doubled. (Source: “Constellation Brands Inc Dividend Date & History,” Nasdaq, last accessed January 11, 2019.)

Analyst Take

As a value-conscious investor, I’m always on the lookout for beaten-down stocks. And that’s why Constellation Brands popped up on my radar. Since the company’s latest earnings report on Wednesday, its share price has tumbled more than seven percent.

However, the company’s financials remain solid. In the reporting quarter, Constellation Brands actually posted a nine-percent increase in revenue and an 18% increase in adjusted earnings per share. (Source: “Third Quarter Fiscal Year 2019 Results,” Constellation Brands, Inc., January 9, 2019.)

At the end of the day, if you have your eyes set on marijuana pure-plays, then Constellation Brands will not be on your shopping list.

However, if you are interested in the potential of the cannabis industry but also concerned about its risks, STZ stock could provide a relatively safe way to get some exposure. At the same time, its stable dividend policy should give investors peace of mind in the event that market sentiment turns against marijuana stocks.