Crown Castle: King of Cell Towers

06/14/2019 5:00 am EST

Focus: REITS

Tom Hutchinson

Editor, Cabot Dividend Investor

Crown Castle International Corp. (CCI) is a REIT that owns and leases roughly 40,000 cell towers, 65,000 small cell towers and 70,000 miles of fiber optic cable primarily to wireless service providers — predominately in the largest U.S. cities, explains income investing expert Tom Hutchinson, editor of Cabot Dividend Investor.

The company operates exclusively in the U.S. and about 70% of revenue comes from the big four U.S. mobile carriers — AT&T (T), Verizon (VZ), Sprint (S), T-Mobile (TMUS).

These properties enable mobile data traffic and access to the internet from mobile devices. Despite all those people you always see fiddling with their phones, mobile data is just getting started. It currently accounts for just 6% of all internet traffic, up from 3% two years ago.

This traffic, and the infrastructure it requires, is expected to grow like crazy. Mobile data traffic is expected to grow at a staggering rate of 36% per year through 2022. Mobile data is how devices connect to the cloud and supercomputers.

Crown Castle only operates in the U.S. while its peers do business in places like India, China and Brazil. I believe the 5G infrastructure story is so good that I don’t want to risk any weirdness from places that I don’t understand screwing things up.

Meanwhile, CCI is king of the small cell area. A small cell is basically an antenna placed on structures such as streetlights, the sides of building, or poles that supplements a main cell tower. It is typically about the size of a pizza box. The purpose is to increase the range covered by a main cell tower and relieve congestion.

Small cells are a huge deal in the 5G buildout because the new ultrafast connectivity has a very limited range. Small cells are crucial infrastructure for delivering service to a wider area and allowing more users. The country is going to need a ton of these things and CCI leases them out.

As a REIT, which CCI converted to in 2014, Crown Castle pays no income tax at the corporate level provided it pays the bulk of earnings to shareholders in the form of dividends. The yield is currently a respectable 3.58%.

The dividend is also incredibly well supported by the company’s operations. The company leases out its towers and cables with long-term contracts with sizable payment increases built in.

The average remaining length of the contracts is over five years with guaranteed payments of five times current annual revenues over the period. That means that it has already booked the current level of revenue for five years. Everything else it generates from here is growth.

It’s worth noting that this is not an investment designed to knock the cover off the ball and double or triple your money in a short time. Growth in the sector associated with the 5G rollout will simply make this a rock solid income generating investment.

The stock has provided an average annual return of over 15% per year for the last five years and over 20% for the last ten years. Given the current opportunity and the targeted 7% to 8% annual dividend hikes I am expecting the stock to generate at least similar returns going forward.

It is also highly likely that the 5G rollout will be achieved rapidly regardless of the economy, which makes CCI not only a growth story but a defensive one as well. It’s also not only immune from the China trade situation but it might actually benefit as competition in technology increases between China and the U.S.

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