The firm is a real estate investment trust, meaning it does not pay corporate income taxes as long as it distributes at least 95% of income as dividends. REITs have underperformed lately, providing an attractive entry point. With a potential total annual return over 16%, including a 4.6% current yield, the stock merits a look.
Wireless tower operators have enjoyed strong growth from exploding wireless data demand. The tower lessors offer the major wireless carriers lower costs and faster speed-to-market by leasing rather than building out their own infrastructure, particularly by “co-locating” on the same tower as competitors.
The tower firms generate recurring revenue by leasing space on their towers through non-cancelable long-term contracts that typically include annual 3% rent escalators. Leasing to multiple tenants on the same site is incredibly profitable as each additional tenant represents almost pure profit.
Crown Castle is attempting to extend the tower model to “small cells.” Small cell networks are antennas (nodes) on signs, streetlights, and utility poles that add capacity to improve service in congested areas like dense urban and residential neighborhoods, stadiums, universities, and anywhere large crowds gather. These nodes are typically connected to the network by fiber cable.
In addition to its higher yield and cheaper valuation than its peers, we like Crown Castle’s more conservative growth strategy. It has chosen to focus exclusively on U.S. wireless markets. As a result, the company does not have the currency, economic, and regulatory risk associated with volatile emerging markets.
Crown Castle projects 7%-8% increases in adjusted funds from operations (AFFO), consistent with recent years. If we project five years of 7% AFFO growth and apply the typical high P/AFFO of 23.8, shares could reach $240 in five years. Including the 4.6% dividend yield, Crown Castle offers a potential annual total return over 16%. We model the downside as $102, a 20% decline from the current price.