Cannabis Lender with Massive Opportunity
There was optimism in the U.S, cannabis industry after President Joe Biden won the 2020 election. The hope was that the government would decriminalize the use of recreational cannabis, thereby, opening up many opportunities for cannabis companies.
To understand the significance of decriminalization, note that the U.S. cannabis market was valued at around $33.6 billion in 2023, and it’s estimated to grow at a compound annual growth rate (CAGR) of 12.1% in the period from 2024 to 2030. This implies a potential market of $74.74 billion by 2030. (Source: “U.S. Cannabis Market Size & Trends,” Grand View Research, last accessed November 21, 2024.)
This expected scale of the enormous market means significant growth opportunities for cannabis producers. Unfortunately, the Biden administration failed to decriminalize recreational cannabis, which means these companies are shut out from doing financing with the traditional banks.
But when one door closes, another one opens…and that’s where Advanced Flower Capital Inc (NASDAQ:AFCG) comes in.
The company is designated as a real estate investment trust (REIT) that provides institutional loans of between $10.0 million and $100.0 million targeting state-licensed cannabis operators. The loans are secured by commercial real estate along with other types of financing solutions. (Source: “Corporate Profile,” Advanced Flower Capital Inc, last accessed November 21, 2024.)
Advanced Flower Capital stock has advanced 17.4% in 2024 and 23% in the year to November 20.
Trading at $9.63, the stock is above its 200-day moving average (MA) of $8.97 but below its 50-day MA of $10.03. The chart shows some congestion, but Advanced Flower Capital stock is holding in a bullish golden cross.
Chart courtesy of StockCharts.com
Mixed Revenues But Consistent Profitability
Advanced Flower Capital has only three years of reported operating results. While the results have been mixed, the encouraging news is that the company has delivered consistent profits and positive free cash flow (FCF). This has allowed the company to pay dividends.
Revenues hit a record $71.5 million in 2022 versus $38.1 million in 2021 before contracting 24.1% to $54.3 million in 2023. (Source: “Advanced Flower Capital Inc.,” Yahoo! Finance, last accessed November 21, 2024.)
The revenue outlook looks flat, with analysts expecting Advanced Flower Capital to report $54.7 million in 2024 and $56.9 million in 2025. But with interest rates set to decline, the company could see higher demand for loans as long as the cannabis market rises. (Source: Yahoo! Finance, op. cit.)
The great thing about Advanced Flower Capital stock has been the company’s ability to deliver generally accepted accounting principles (GAAP). The high point was in 2022 prior to the drop in 2023.
Nonetheless, Advanced Flower’s profitability has allowed for its strong dividends, and the outlook is positive.
| Fiscal Year | GAAP-Diluted EPS |
| 2021 | $1.52 |
| 2022 | $1.79 |
| 2023 | $1.02 |
(Source: Yahoo! Finance, op. cit.)
Analysts expect Advanced Flower Capital Inc to increase GAAP profits by 48% to $1.51 per diluted share in 2024, followed by $1.46 per diluted share in 2025. There are high estimates of $1.73 and $1.65, respectively, for 2024 and 2025. (Source: Yahoo! Finance, op. cit.)
The funds statement also shows the company’s ability to generate positive free cash flow (FCF). This helps support the nice dividend stream.
| Fiscal Year | FCF (Millions) |
| 2021 | $9.5 |
| 2022 | $31.3 |
| 2023 | $21.2 |
(Source: Yahoo! Finance, op. cit.)
Advanced Flower Capital has a manageable balance sheet, with $148.5 million in total debt and $122.2 million in cash at the end of September. The total debt to equity ratio of 72.1% is not an issue, and it was helped by strong working capital. (Source: Yahoo! Finance, op. cit.)
Advanced Flower Capital Stock: Strong Dividend Flow to Continue?
Advanced Flower Capital Inc has paid steady dividends since becoming a publicly traded company in 2021.
Advanced Flower Capital stock’s recent dividend of $0.33 per share has been in place for six straight quarters since the June 2023 quarter. Prior to this, the quarterly dividend was $0.38 per share in March 2023 and December 2022. (Source: Yahoo! Finance, op. cit.)
The current dividend with Advanced Flower Capital stock, despite the drop in June 2023, has grown 26.9% since the initial dividend of $0.26 per share in the June 2021 quarter.
The payout ratio is 129.4%, based on 2023 GAAP earnings, but it’s expected to fall to 87.4% based on the 2024 estimate. The higher payout ratios are typical of REITs.
The Lowdown on Advanced Flower Capital Stock
Advanced Flower Capital stock’s institutional ownership of 36.3% of the outstanding shares is decent for a company with a market valuation of only $200.0 million. (Source: Yahoo! Finance, op. cit.)
The relatively high insider ownership of 17.84% should drive insiders to deliver better results. (Source: Yahoo! Finance, op. cit.)
Value-wise, AFCG stock trades at an attractive 6.4 times its consensus 2024 earnings-per-share estimate. Advanced Flower Capital stock also trades just above its book value of around $9.42 per share.