This Pot Stock Deserves Special Attention
If you haven’t already, you might want to take a look at Scotts Miracle-Gro Co (NYSE:SMG).
In this year’s volatile market, what could be better than a pot stock with a soaring share price?
The answer: a soaring pot stock that also gives investors “bonus checks.”
Sound too good to be true?
Well, it is happening. All you need to do is take a look at SMG stock.
Headquartered in Marysville, Ohio, Scotts Miracle-Gro Co is not the typical pot stock.
The company’s history can be traced all the way back to 1868, when Orlando M. Scott began selling lawn seed. Today, SMG is one of the largest marketers of branded consumer products for lawn and garden care in the world.
The neat thing is, while Scotts Miracle-Gro Co is an old company, it managed to capitalize on the booming legal cannabis industry—which is quite new in most jurisdictions.
In particular, SMG’s wholly owned subsidiary, Hawthorne Gardening Company, is a leading distributor of hydroponic products in North America. It provides nutrients, lighting, supplements, growing media, and other materials needed for hydroponics to both commercial growers and home hobbyists.
Of course, you can use hydroponic systems to grow a lot of things, including lettuce and tomatoes. But the biggest catalyst for Hawthorne is definitely the cannabis industry.
In 2016, Hawthorne’s general manager, Chris Hagedorn, said, “Right now, we’re squarely focused on what’s made this business successful: high-value crops.” (Source: “How one of America’s most visible Fortune 1000 giants quietly snuck into the cannabis industry,” The Cannabist, September 22, 2016.)
And indeed, the booming cannabis industry in North America gave a huge boost to the hydroponic product supplier’s business. In 2016, Hawthorne generated $121.0 million in net sales. By 2019, this number had grown by more than fivefold to $671.0 million. (Source: “Raymond James 41st Annual Institutional Investors Conference,” Scotts Miracle-Gro Co, last accessed September 22, 2020.)
The success of Hawthorne also allowed the century-old Scotts Miracle-Gro Co to climb aboard the marijuana profit train. And investors are loving it.
Since the beginning of this year, SMG stock has surged 41%. To put that in perspective, the North American Marijuana Index is down about 14% year-to-date.
Scotts Miracle-Gro Co (NYSE:SMG) Stock Chart
Chart courtesy of StockCharts.com
As I said in the beginning, this pot company delivers more than just a surging stock price. And that’s because, on July 29, the company announced a special dividend of $5.00 per share. The special dividend was paid on September 10, 2020 to shareholders of record as of August 27. (Source: “ScottsMiracle-Gro Announces Third Quarter Financial Results, Increased Fiscal 2020 Guidance and Approval of Special Dividend,” Scotts Miracle-Gro Co, July 29, 2020.)
In other words, SMG stock investors received a “bonus check” on top of the company’s impressive share price performance.
Since the “bonus check” was already paid and was a special dividend—meaning it is not expected to be recurring—why do we still care about SMG stock?
Well, it’s because, compared to other companies operating in the marijuana industry, Scotts Miracle-Gro Co could be the most resilient.
You see, the share prices of marijuana companies are known to be volatile. In the market sell-off earlier this year, a lot of pot stocks dropped to the floor. Many of them have yet to make a full recovery.
The blunt reality was that the COVID-19 pandemic has resulted in an unprecedented operating environment for businesses, and, at one point, investors were selling almost everything.
In fact, the impact was so huge that, at the time of this writing, the Dow Jones Industrial Average—which consists of some of the biggest and most established companies trading on U.S. stock exchanges—is still in the red year to date.
When investors enter risk-off mode, they tend to unload the most volatile tickers, which is why pot stocks fell particularly hard. But, as we have seen from the above chart, Scotts Miracle-Gro stock quickly bounced back from the downturn, and went on to climb to new highs.
Obviously, past performance is no guarantee of future results, especially in this challenging time. However, the resilience in SMG stock was backed by a rock-solid business.
Just take a look at the latest earnings report and you’ll see what I mean. In the third quarter of SMG’s fiscal year 2020, which ended June 27, the company generated $1.5 billion in total sales, representing a 28% increase year-over-year.
Notably, sales at Hawthorn surged 72% year-over-year to $302.9 million. So, essentially, the cannabis-focused subsidiary now accounts for over one fifth of the company’s top line. Moreover, segment income from Hawthorne surged an even more impressive 145%.
In a recession—and there was a quite serious one in the second quarter of the current calendar year—people typically spend less money. However, because people were stuck at home this year due to the pandemic, they had more time to do gardening. And that has actually led to an increase in demand for Scotts Miracle-Gro’s products.
In the reporting quarter, sales at SMG’s U.S. Consumer segment rose 21% year-over-year to $1.08 billion. Segment income from U.S. Consumer increased by 14%.
Excluding impairment, restructuring, and other one-time items, Scotts Miracle-Gro earned an adjusted net income of $216.8 million, or $3.80 per diluted share. This marked a sizable improvement from the $176.3 million, or $3.11 per share, of adjusted profit the company generated in the year-ago period.
Keep in mind that the cannabis industry is facing a lot of uncertainty, which is one of the main reasons why pot stocks are often considered risky. Scotts Miracle-Gro Co has a booming cannabis-focused segment, but, as we just saw, it also has a non-cannabis business that generates over $1.0 billion in quarterly sales. Adding in the fact that the company is already profitable, SMG stock can actually appeal to risk-averse investors.
The best, though, is likely yet to come. In the June quarter earnings release, Scotts Miracle-Gro Co raised its outlook on sales and profits for the full fiscal year. Then, on September 14, management issued another update, saying that they expect the results to be even better than the upwardly revised guidance.
“The momentum of our business continues to exceed our expectations in both the U.S. Consumer and Hawthorne segments,” said the company’s chief financial officer, Randy Coleman. (Source: “ScottsMiracle-Gro Updates Outlook for Fiscal 2020; Net Sales, Non-GAAP Adjusted Earnings Expected to Exceed Prior Guidance,” Scotts Miracle-Gro Co, September 14, 2020.)
“For fiscal 2020, which ends September 30, we now expect non-GAAP adjusted earnings will be approximately $7.25 per share driven by company-wide sales growth of more than 30 percent,” he added.
And that’s not all. Remember when I said that special dividends are not expected to be recurring?
Well, as it turns out, other than giving investors that one-time “bonus check,” Scotts Miracle-Gro Co also pays a regular dividend, which is recurring. On the same day that management announced the special dividend, they also announced a seven-percent increase to the company’s regular quarterly dividend, bringing it to $0.62 per share.
Over the past five years, SMG stock’s quarterly dividend rate has grown by 31.9%. (Source: “Dividend History,” Scotts Miracle-Gro Co, last accessed September 22, 2020.)
The dividend policy is another reason why SMG stock can be a relative safe pick for cannabis investors: no one can predict a company’s stock price with certainty, but when a company decides to pay a dividend, its shareholders will earn a cash return.
Compared to how much SMG stock has gone up, its regular dividend—and even the special dividend—may not seem like much. However, keep in mind that the legal cannabis industry is still at an early stage, and a lot of pot companies are still incurring losses and burning cash, so Scotts Miracle-Gro’s ability to return cash to investors makes it stand out. Plus, in an era where earnings can be adjusted while dividends still have to be paid in cash, a steadily increasing dividend stream can be considered a more genuine sign of strength.
All in all, even though Scotts Miracle-Gro Co is not a pure-play pot stock, it offers investors one of the most reliable ways to get some exposure to the fast-growing cannabis industry.