“You can’t have your cake and eat it too”
We heard this expression used recently when trying to describe how hard it is to invest in a company that has a large dividend and significant growth potential.
Although this is typically the case with public companies; it is not the case in the cannabis industry, specifically when you look at Compass Diversified Holdings (CODI).
Compass presents investors the opportunity to invest in a company levered to the rapidly growing hemp industry and also offers an 8.3% dividend yield. CODI owns and manages a diverse family of established North American businesses that are leaders in its respective niche market.
One of a Kind
Although cannabis is one of the fastest growing industries in the United States, there is not much reliable information available as to credible investment opportunities. There are over 350 publicly traded cannabis companies and more than 95% of them trade on the OTC exchange.
Compass is very different when compared to the rest of the cannabis industry. First, the company trades on the New York Stock Exchange which the world’s largest stock exchange by market capitalization. Second, the company offers a dividend; something that is not done by any other cannabis company (except for Scotts Miracle Grow, which is levered to the growth in the hydroponic industry). Finally, the shares are not nearly as volatile when compared to other publicly traded cannabis companies.
Levered to the Hemp Food Market
Compass is levered to the cannabis industry via its acquisition of Fresh Hemp Foods in July 2015, which was founded in 1998 in Winnipeg, Canada. CODI purchased Fresh Hemp for $132.5 million (CAD) and it has continued to see double digit revenue growth since its acquisition.
Fresh Hemp operates under the name Manitoba Harvest and it offers hemp hearts, heart bites, protein powders, oils, and food starter packs.
Manitoba Harvest produces and sells its products online and through retail stores in North America. Its products are carried in approximately 7,000 retail stores across the United States and Canada.
Hemp Can Change the World
Since growing hemp has been illegal for almost a full century, researchers have been unable to learn all of the benefits associated with it. Hemp is a distinct variety of the cannabis plant but it is not the same substance as marijuana. Although hemp is commonly associated with marijuana, it should not be.
The benefits associated with hemp are endless. A number of products which are used by people every day can be created from hemp. These include paper, clothing, building materials, fuel, and nutrition.
Industrial hemp and marijuana are two completely different plants. Hemp contains a very small amount (less than 1%) of tetrahydrocannabinol (THC), the primary psychoactive ingredient in marijuana (the chemical that gets a user high).
The Search for Growth and Yield Just got Easier
Low interest rate around the global has compressed yields, which has made the search for income producing stocks more challenging for investors.
We are favorable on CODI due to its large dividend as well as its growth potential. The company has been able to continuously support its dividend through the investments it has made. Over the next twelve months, we expect to see CODI continue to grow its dividend as the company’s bottom line benefits from its acquisitions over the last year.
Today, Compass closed the acquisition of 5.11 Tactical, a leading designer and marketer of purpose-built tactical apparel and gear serving a wide range of global customers including law enforcement, military special operations and firefighters, as well as outdoor enthusiasts.
As part of the transaction, CODI acquired a substantial tax asset, the positive effect of which will be meaningful for annual cash flow. The acquisition of 5.11 is expected to provide $0.30 to $0.35 per share of cash flow on an annualized basis.
CODI is up more than 8% this year and when you combine the share price appreciation with its dividend, you would have a return that is greater than 16% this year. We recommend that investors keep an eye on CODI as it offers a less-risky way to invest in the cannabis sector.