CCI - Crown Castle: A Great Mix Of Current Yield And Dividend Growth

Summary

• Crown Castle recently released solid Q4 results. The company continues to build out its 5G footprint here in the US.
• The REIT has been investing in small cells and fiber to do this.
• Shares represent a great risk/reward today at a price/FFO of 19.1x with a 4.4% yield.
• The annual dividend hikes should continue at a mid-single digit rate.

While markets have rallied to start the year, I’m starting to question how much upside the large cap stocks and indices have from current valuations. As a wise investor once said, it’s a market of stocks, not a stock market. One of the stocks I still find attractive a couple months into 2023 is Crown Castle ( CCI ). I figured I would write an update on the REIT because I wrote an article on American Tower ( AMT ) yesterday, which I also think is a strong buy at current prices. Investors that prefer an international portfolio of assets and potential for higher dividend growth might choose American Tower, while investors looking for a slightly cheaper valuation and larger current yield might choose Crown Castle.

Investment Thesis

Cell Tower REITs like Crown Castle and American Tower are a crucial part of the world’s communication infrastructure. I see long term tailwinds for data usage and cell service, and Crown Castle is in the process of building out their 5G network. I also talk about Crown Castle’s improved debt profile and valuation that I think is attractive today. Shares are currently at a price/FFO of 19.1x, and I think investors can expect continued dividend growth on the 4.4% yield. Crown Castle is a different REIT from American Tower, but I think both REITs have great risk/reward profiles today.

Overview

Crown Castle recently posted solid Q4 earnings, which along with the recent earnings call shows that the growth will likely continue. Revenue and FFO were basically in line with estimates, but after skimming the earnings call, a couple paragraphs stood out to me.

Turning to small cells, we expect to double the rate of small cell deployments this year to 10,000 nodes with over half co-located on existing fiber to meet the growing demand from our customers as 5G networks will require small cells at scale. With approximately 60,000 nodes on air and another 60,000 contracted in our backlog, I believe 2023 will represent the first year in a sustained acceleration of growth for our small cell business. We also continue to see opportunities to add to the returns we are generating from small cells by leveraging the same shared fiber assets to pursue profitable fiber solutions growth and we expect to return to 3% growth as we exit 2023.

Looking at the bigger picture beyond this year and why I am so excited about our growth opportunity, we are still in the early innings with 5G as the industry is only a couple of years into what we expect will be a decade-long growth opportunity. Our customers are seeing significantly higher levels of monthly data consumption as consumers upgrade to 5G, providing the need for significant network investment for years to come to keep pace with this persistent growth in mobile data demand.

- Crown Castle Earnings Call

The Difference Between CCI’s Towers & Fiber

I have talked about Crown Castle’s assets in past articles and the difference between their strategy and American Tower. Crown Castle focuses exclusively on the US, and they have been prioritizing their investments in small cells ideal for urban locations. I have skipped over the fiber investments in the past, and I wanted to show a slide from the investor presentation on some of the different characteristics of Crown Castle’s fiber investments.

They have invested more in towers, which have proved to be attractive investments for the REIT, but the fiber investments are going to be a key asset for their 5G buildout strategy. While I’m curious to see how things develop with 5G in coming years, Crown Castle is a logical choice for investors looking to buy a piece of America’s communication infrastructure. One of the other things that Crown Castle has worked on in recent years is improving their debt profile.

I haven’t talked much about Crown Castle’s debt profile in the past, but as I looked at a recent investor presentation, the slide above has a lot of things worth noting. Their weighted interest rate has gone down significantly, by a half of a percent, while the weighted maturity has gone up over three years. They were also able to move a chunk of the debt from variable to fixed rate, while also moving 40% of their debt from secured to unsecured. Overall, that’s a pretty impressive change since the end of 2015.

Valuation

While markets have rallied to start the year, Crown Castle is only up a couple percent YTD. Shares are attractive today at a price/FFO of 19.1x. This is a couple turns cheaper than the average multiple, and it is also a couple turns cheaper than big brother American Tower. I think this discount is justified due to American Tower’s superior growth, but I still think the risk/reward for investors buying shares of Crown Castle is very attractive today.

Growth is projected to slow and then go negative in 2025, but I think Crown Castle has a pretty good chance of continuing their FFO/share growth for years to come. While it will take several years to execute their 5G buildout, I think long term FFO/share growth is possible for Crown Castle. The other reason to like Crown Castle is their sizable yield and dividend growth.

A Solid Combo Of Current Yield & Dividend Growth

REIT investors all look for different things when it comes to their checklist. Some prefer cheap valuations and higher dividends, while others prioritize dividend growth and are willing to pay a premium valuation to get it. Crown Castle has a foot in both camps, with a yield of 4.4% and a consistent track record of mid-single digit growth. Their most recent increase was a 6.5% hike. Crown Castle goes with annual increases, but American Tower has long given investors quarterly increases. American Tower has provided better dividend growth for its 2.9% yield in the past, and I think it could provide better dividend growth moving forward. I like both, which is why I own both, but I think both will continue to grow their quarterly payouts for years to come.

Conclusion

One of the reasons I’m so bullish on the tower REITs is that they have long term tailwinds that show no signs of slowing. Crown Castle has continued its 5G buildout, including fiber and small cells. They have also improved their debt profile, and the valuation is attractive after shares have dropped more than 30% from a peak over $200. Shares are currently trading for a price/FFO of 19.1x, which is cheaper than its average multiple. American Tower is a bit more expensive, but it has better dividend growth on its 2.9% yield. For the investors looking for current income, Crown Castle and its 4.4% yield might be a better fit. I think the risk/reward is very good today, and for me, it comes down to a simple question: why not own both?

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