CCI - Crown Castle: Have Your Wireless Carrier Pay You Back

2023-04-24 09:40:00 ET

Summary

• CCI pursues a different strategy compared to its peers due to its focus on small cells in addition to towers.
• It recently posted respectable Q1 results and management sees plenty of potential with the 5G rollout.
• The market has already baked in slower growth over the next 2 years, presenting patient value investors with an attractive starting yield.

It pays to be patient and wait for the right time to layer into quality dividend payers when they get cheap. Even better is when the underlying company provides essential infrastructure services that are relatively immune to a recession.

Such I find the case to be with Crown Castle Inc. ( CCI ), which I last covered here in February, highlighting its strong fundamentals. As shown below, CCI has dipped significantly over the past 12 months, with a 36% price drop. In this article, I highlight CCI’s recent Q1 results and discuss why it’s a solid income opportunity for value investors at present.

Why CCI?

Crown Castle, alongside peers American Tower ( AMT ) and SBA Communications ( SBAC ), is one of the 3 largest cell tower REITs in the U.S. At present, it operates and leases more than 40,000 cell towers and 85,000 miles of route fibers supporting small cells across every major market. The U.S. wireless market is dominated by the three major carriers Verizon ( VZ ), AT&T ( T ), and T-Mobile ( TMUS ). They all carry investment grade rated balance sheets and CCI counts all three as its customers.

The continued proliferation of connected devices (not just cell phones) along with the deployment of 5G networks present a forward growth opportunity for CCI. This is reflected by a site rental revenue growing by 4% YoY in the first quarter of this year. While the growth seems underwhelming, it’s worth noting that CCI’s near term results are impacted by the Sprint network rationalization due to its merger with T-Mobile.

Notwithstanding slower growth in the near term, management expects underlying demand trends in the U.S. to allow it to deliver long-term annual dividend growth at 7% to 8% (starting in 2026), and expects to achieve this through both internal and external growth through investment in new assets.

This is supported by mobile data demand growing by a factor of 62x since the early days of 4G in 2011, and wireless spending by network providers during the 4G era was to the tune of $30 billion per year. During that time, CCI made strategic investments in small cells, which aided customers with increasing demand during the latter part of the 4G cycle. This enabled CCI to deliver 9% annualized dividend growth since 2017, returning $12 billion of capital to shareholders (or 20% of CCI’s current market capitalization).

The 5G cycle is still in the early stages, and may follow the same trajectory as the previous generation. Moreover, CCI pursues somewhat of a different strategy compared to its peers due to its focus on small cells in addition to towers. Management reiterated this strategy, noting how small cells are complementary to towers and the opportunity ahead during the Q&A session of the recent conference call :

On your second question around small cells, the big driver here, as we saw and I mentioned this in my comments with 4G, certainly have seen a significant amount of site densification that frankly, towers just can't serve that need for densification of the network.

We saw that at the end of 4G and both, I think in terms of the number of small cells that we've seen thus far in 5G commitments from the carrier customers as well as the conversations that we're having about what is to come in the future suggest that that opportunity is significantly more than what we saw during the 4G era.

Meanwhile, CCI maintains a respectable BBB rated balance sheet with a net debt to adjusted EBITDA ratio of around 5x. Plus, 85% of its debt is fixed rate with long weighted average maturity of 8 years, and just 10% of CCI’s debt is maturing through the end of next year.

Potential headwinds for income investors arise from management’s comments that dividend growth through 2025 will be minimal, due to the aforementioned Sprint network rationalization and 10% of debt maturing through 2024, which will likely be refinanced at higher interest rates. However, management is sticking to 7% to 8% annual dividend growth starting in 2026 and importantly, the current dividend rate is covered by an 82% AFFO payout ratio (based on 2023 AFFO/share of $7.63).

It appears that the market has already baked in muted dividend growth in the near term, with CCI’s share price currently sitting near the low end of its 52-week range at $126 with a 5% dividend yield. This equates to a forward P/FFO of 16.3 and as shown below, this sits well below CCI’s normal P/FFO of 21.8. Sell side analysts who follow the company have a consensus Buy rating with an average price target of $153 , implying a potential 26% total return over the next 12 months.

Investor Takeaway

Crown Castle is well-positioned to benefit from the continued 5G rollout and capital deployment by the Big 3 wireless carriers. It’s worth noting, however, that near-term growth may be muted due to factors beyond the company’s control. It appears that the market has already baked in slower growth over the next couple of years, presenting patient value investors with an attractive 5% yield and potential for capital appreciation as the 5G story plays out.

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