CCI - Crown Castle: Good Alternative To Government Bonds

2023-04-24 03:21:43 ET

Summary

• Crown Castle receives steadily growing revenues from telecom providers who install their network infrastructure on Crown Castle's towers, small cells, and fiber optics.
• The global communications infrastructure market is expected to grow at a CAGR of 15%. Demand for 5G networks is high and is expected to grow at a CAGR of 69%.
• Thanks to Crown Castle's attractive balance sheet with little debt and high-interest coverage, it will also easily bear the higher interest rate environment.
• What does cause concern is the moderate outlook.
• Crown Castle remains a strong REIT with a high dividend yield and can be seen as a good alternative to government bonds.

Introduction

Crown Castle ( CCI ) is a REIT that owns and leases communications infrastructure, such as cell towers, small cells and route miles of fiber optics for wireless service providers in the United States. It owns and leases these towers, but does not invest in wireless infrastructure such as 5G systems. Therefore, it is not financially dependent on technological developments.

Earlier in February this year, I wrote an article about another REIT in the wireless communications sector, American Tower (AMT), and gave it a buy rating. Although the stock has not changed much since then, it is still valuable today. In this article, I also include American Tower to compare its stock rating.

We see that the overall return over the past 10 years is nice, but Crown Castle does lag behind. It should be noted that American Tower's stock valuation is more expensive than Crown Castle's.

In my article, I write about why I prefer American Tower over Crown Castle. But Crown Castle is also worth buying because of its attractive dividend yield and growth potential.

Crown Castle's Financials

Crown Castle offers small cells in addition to cell towers; these offer better network density in a given area. For both, the return on assets for 3 tenants is the same; namely, in the mid-teens. For fewer tenants, small cells seem more interesting; however, the annual escalators are lower.

The growth is mainly characterized by contracted escalators and the increasing use of communication technology such as 5G networks. Consumers using their smartphones, tablets, laptops, and even their Apple Watch is being networked with 5G. 5G is expected to grow at a CAGR of 69% through 2030, and the global communications infrastructure market is expected to grow at a CAGR of 15% during the same period. Crown Castle operates in a growing market.

Of an equal proportion of cash from operations, acquisitions are made. We see that Crown Castle has made mostly fiber acquisitions, but this is proving less profitable than operating communications towers. Crown Castle has grown strongly and has been able to grow enterprise value by an average of 12.9% per year.

With net debt of $22.1 billion and funds from operations of $3.4 billion in 2022, the amount of debt does not seem particularly high. The interest coverage of 3.5 shows that the company has sufficient cash flows to meet its interest payment obligations. 87% of their debt is fixed-rate and 13% is of variable rate. The interest expense of the variable part will increase in the coming years due to the sharp increase in interest rates. Debt maturities look good, with no significant maturities until 2026. This must be refinanced by then but what the interest rate will be is not sure yet. The Fed expects a recession in late 2023, which could be a trigger to stop the interest rate hikes. The 2026 maturity is ideal because interest rates may have fallen by then.

Dividends and Share Repurchases

Crown Castle pays a handsome dividend of $6.26 per share that represents a dividend yield of as much as 5%. Rising funds from operations increased the dividend along with it, averaging 8.9% a year. Analysts expect an increase of 2.7% for next year, this is likely due to the moderate outlook. For the long term, Crown Castle is targeting dividend growth between 7% and 8%.

Its dividends increased steadily over the past 4 years, and to supplement this, Crown Castle repurchased a small portion of the shares. In total, 79% of the company's FFO were distributed to shareholders, which is sustainable for the long term.

The Valuation Of CCI And AMT

The historical price to FFO ratio indicates an average value of 24.5. In 2021, it was highest at 32.8 after which there was a significant drop and the ratio recorded 17.2 in 2022. Currently, the price to FFO ratio is 16.3, which may indicate an undervaluation.

The growth of funds from operations is also important in determining whether the current valuation is attractive in the near future. About 6 analysts are positive, while 4 analysts have revised their expectations downward. In the table below, I have examined expectations for the next 3 years for both Crown Castle (left), and American Tower (right). We see that growth in FFO for Crown Castle is declining, while that for American Tower is expected to increase. We also see that the P/FFO ratio for Crown Castle is currently valued more favorably than that of American Tower. But if we look to the near future, both companies are equally valued, provided American Tower can meet its growth expectations.

So in this comparison, I prefer American Tower because its growth may continue, while Crown Castle's is expected to stagnate.

Does this mean we should rule out Crown Castle? No. With a dividend yield of 5%, Crown Castle offers an attractive income for years to come. The dividend is also expected to rise. Crown Castle's stock price will not rise as quickly, but this REIT is a great alternative to government bonds with growth potential.

Conclusion

Crown Castle receives steadily growing revenues from telecom providers who install their network infrastructure on Crown Castle's towers, small cells and fiber optics. More and more consumers are using the Internet, assuring Crown Castle of steadily growing revenues. The global communications infrastructure market is expected to grow at a CAGR of 15%. Demand for 5G networks is high and is expected to grow at a CAGR of 69%. 5G needs better coverage and therefore I expect strong growth in this communication infrastructure segment. Thanks to Crown Castle's attractive balance sheet with little debt and high interest coverage, it will also easily bear the higher interest rate environment. Significant debt maturities will not come until 2026 and interest rates may have fallen before then. So investors need not worry about upcoming debt maturities. What does cause concern is the moderate outlook. Funds from operations is expected to fall and the share price decline makes its equity valuation attractive. Therefore, I prefer another REIT, namely American Tower. But Crown Castle remains a strong REIT with a high dividend yield and can be seen as a good alternative to government bonds.

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