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Can Constellation Brands up its Canopy stake while rewarding shareholders?

Corona beers are pictured at a BevMo! store ahead of Constellation Brands Inc company results in Pasadena, California U.S., October 4, 2016. REUTERS/Mario Anzuoni/Files

The incoming chief executive of Constellation Brands Inc. (STZ) called the emerging cannabis industry one of the most significant global growth opportunities in a lifetime, following the company’s third-quarter earnings on Wednesday.

However, the New York-based alcohol giant said any decision to up its stake in Canadian pot producer Canopy Growth Corp. (WEED.TOwill have to fit with plans to return cash to shareholders.

Constellation Brands agreed to pay about $245 million for a 9.9 per cent stake in Canopy in October 2017. The company sparked a pot stock rally last August when it announced an additional $5-billion dollar investment in the Smiths Falls, Ont.-based cannabis producer, achieving approximately 38 per cent ownership.

If Constellation exercises all of its warrants, its ownership in Canada’s largest pot company would exceed 50 per cent. The warrants expire in November of 2021.

Chief Financial Officer David Klein told investors on a conference call Wednesday morning that he has faith the company can deliver on its plan to return cash through share repurchases and dividends, and fund its Canopy warrants.

“However, we will only fund the Canopy warrants if it makes sense and the business is unfolding as we expect when we get into November of 2021,” he said on the call. “If the business isn’t going well, we’ll have a lot more cash to return to our investors.”

Shares of Constellation Brands plunged 10.42 per cent to $154.38 in New York at 1:13 p.m. ET on Wednesday. The company cut its 2019 profit forecast, citing weak wine and spirit sales, as well as interest expenses related to the Canopy deal.

New York-listed Canopy shares (CGCgained 11.34 per cent to $33.07 at 2:21 p.m. ET.

(Yahoo Finance Canada)

The Corona beer and Kim Crawford wine-maker’s foray into the notoriously volatile cannabis sector has been met with skepticism by timid investors, as well as downgrades by some analysts.

However, Cowan analyst Vivien Azer sees Constellation Brands’ aggressive push into cannabis as a hedge against declining beer consumption, following the worst year for beer sales in about a decade. She said her research shows rising cannabis use is directly related to less beer consumption.

“You take a consumer that on an occasion would have three our four beers, and they add cannabis to the mix, now it’s more like one or two beers,” Azur said on Cowan’s cannabis industry outlook conference call on Tuesday. “I’ve been, for over two years now, challenging the alcohol CEOs publicly on their earnings calls on the impact of cannabis.”

The third-largest U.S. beer company said it expects Canopy will achieve its C$1-billion revenue run rate target within the next 18 months.

Bill Newlands will assume the role of president and chief executive officer on March 1. He said opportunities in cannabis are opening up faster than the company had anticipated.

“Canopy Growth provides a single platform for Constellation to address all global markets and product formats,” Newlands said on the conference call. “Our Canopy investment is like a venture investment, which positions us to use our capabilities in building brands in a regulated industry to take advantage of the legitimization of an emerging US$200 billion global industry.”

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