Cannabis Musings - September 6, 2023
Why is GTI buying back its own stock?
Friends –in the wake of a marvelous explosion in cannabis stock prices following last week’s cannabis rescheduling news, Green Thumb Industries announced earlier this week a program to buy back its own stock. What’s the deal with that?
Public companies buy back their own stock for a number of reasons. The most straightforward reason is that it reduces the number of shares outstanding (technically, they’re still “issued,” but when they’re held by the company “in treasury” after being bought back, they’re kinda ignored), which reduces the denominator when you’re calculating a company’s earnings per share (earnings/number of shares issued and outstanding), and makes each remaining share of stock a little more valuable because it represents a little bit more of a percentage of the company.
It's also viewed as a way to return capital to the stockholders in a way that’s more tax-efficient than dividends (which are taxable). Stock buybacks don’t literally result in holders receiving money (like dividends), but because it’s reducing the denominator (see above), it’s viewed as being somewhat equivalent.
Finally, it sends a signal to the market that the company thinks its own stock is undervalued, and so it’s willing to spend its own money to buy itself on the cheap. Such a deal, nu?
If this is such a great idea, then why isn’t every public cannabis company, whose stock prices have been equally decimated over the past few years, also buying back its own stock? (Ayr Wellness announced a similar program in 2021, but, as far as I know, they never actually bought back any shares). Well, because it takes a whole lot of spending money to do so, and cannabis companies aren’t really known for having much excess cash lying around. I’m guessing though that GTI, which is in the somewhat unique position of generating positive net income, decided that its cash position was comfortable enough to take the risk.
Why not spend the money though by paying down debt, or buying other companies, or on capital expenditures? I imagine that GTI’s board considered each of these questions when evaluating whether to institute the buyback program (which doesn’t require GTI to actually buy shares – it just authorizes it). There may be limitations and costs (like prepayment premiums) on paying down debt early. And, as we’ve discussed before, M&A isn’t that attractive when a target’s liabilities can’t be easily discharged, and your own stock price is very low (cannabis M&A tends to be done with stock, rather than with cash, so a low stock price means you’re issuing more shares as consideration, further diluting your current owners, which they tend not to like).
Is this a good idea? Well, it’s a tried-and-true practice in corporate finance, and it may be the highest-and-best use for GTI’s excess cash at the moment (even with 90-day T-Bills at a mind-boggling 5.30%). At the same time, history has shown that nothing goes as expected in the cannabis industry (and that’s almost always to the downside), access to investor capital remains at bupkes levels, and things can change very quickly. So, who knows? This isn’t investment advice, and the purpose of these Cannabis Musings is merely to elucidate.
However, similar to Pelorus Capital Group’s recent securitization of cannabis loans, which we recently discussed, accretive (basically meaning something that grows value) actions like stock buybacks, whether sensible or meshugge, further normalize the cannabis industry. Which is nice.
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© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.