Cell Tower = Dividend Power

This article was coproduced with Cappuccino Finance.

Data usage on smartphones has exploded in the past several years, and the demand for wireless and telecommunication infrastructure is only increasing.

The total U.S. mobile data traffic is expected to grow at 23% per year (CAGR between 2022 to 2027), and the growth in both the number of wireless devices and the data usage per device will be the main drivers behind this large growth.

There are several different ways to take advantage of this trend. Investing in telecommunication companies like Verizon (VZ) or AT&T (T) would be a good choice. Given their dominance in the industry and strong cash generating ability, Verizon and AT&T will be great investments for a long time.

Investing in device manufacturers like Apple (AAPL) and Microsoft (MSFT) is another possible option to get in on the growth in wireless devices.

In the realm of real estate investment, we have cell towers REITs. In my opinion, they are one of the best ways to benefit from the large growth in telecom. They provide the necessary real estate to telecommunication companies and collect rent.

The three companies in this article (American Tower, Crown Castle Inc., and SBA Communications) are leaders in the space, and offer an enticing mix of growth and profitability.

American Tower (AMT)

American Tower is a large global REIT that owns, operates, and develops multi-tenant communications real estate. Their primary business is to lease real estate to wireless service providers, radio and television broadcasting companies, wireless data providers, and government agencies.

American Tower has properties all over the word, and they have more than 200,000 real estate assets.

American Tower is doing a great job at managing their balance sheet and allocating capital efficiently. Their net leverage ratio stands at 5.5x, and the average remaining term on debt is at 5.9 years.

American Tower has sufficient liquidity ($7.0 B) on hand to support their growth. 77% of their debt is fixed rate.

American Tower has been growing their dividend substantially, and the growth rate has been far better than the sector median. The dividend growth rate of American Tower in the past five years was 17.47% (five-year CAGR), compared to the sector median of 1.66%.

Given the AFFO payout ratio is at 59.98% and FAD payout ratio is at 51.93%, I believe the dividend payment from American Tower is safe at this point. Based on the strong operational results, I expect them to continue to raise their dividend in the future.

Looking at the valuation metrics, American Tower is undervalued at this point. The current P/AFFO ratio of 22.16x and P/FFO ratio of 21.65x are about 10% lower than their five-year average. The rating tracker of iREIT shows the margin of safety for American Tower is now at 10% (and a BUY).

Crown Castle Inc. (CCI)

Crown Castle is a REIT that owns, operates, and leases cell towers, small cells, and fiber solutions across the U.S. They have more than 40,000 cell towers and longer than 80,000 route miles of fibers. Crown Castle has been growing at a solid pace in the past several years, and I expect them to continue their expansion going forward.

Recently, Brad and Nicholas covered Crown Castle in this article – this is a sector and company that the iREIT team keeps close eyes on.

Crown Castle has a high quality and low risk balance sheet. Also, it’s improving over time. Looking at their debt maturity schedule, it’s very well spread over the next decade and beyond, so their debt maturity is very well managed.

The weighted average coupon rate is at 3.3%, and the weighted average debt maturity is at 8.5 years. 84% of their debt is fixed rate, and 93% of the debt is unsecured.

As their business has grown over time, Crown Castle has been raising their dividend accordingly. The AFFO growth rate of Crown Castle has been 8.74% per year in the past five years (five-year CAGR), and the growth rate of dividend per share has been 9% per year (CAGR) since 2016.

They continue to have great operational results, so I expect them to continue raising their dividend.

For full-year 2022, Crown Castle’s organic tower revenue grew by 6.5%, which led the industry. Their customers are upgrading existing tower sites with additional spectrums and new equipment to support new 5G networks, and this work largely contributed to Crown Castle’s revenue growth. Additionally, Crown Castle deployed 5,000 small cells to support initial network densification across the U.S.

Management expects the positive operational momentum to carry over to 2023. CCI is a BUY.

SBA Communications (SBAC)

SBA Communications is a leading owner and operator of wireless communications infrastructure that includes tower structures, rooftops, and antennas. Their top domestic customers include T-Mobile, AT&T, and Verizon, and their top international customers include America Movil, Telefonica, and TIM.

The business strategy of SBA Communications drives their growth and profitability. They focus on maximizing their tower capacity, effectively utilizing their scale and management experience, and making disciplined acquisitions.

This approach has certainly been successful, and it is shown by their AFFO growth of 12.02% per year in the past five years. Revenue has been growing consistently in domestic and international markets in the past several years.

In line with their strong business growth, their dividend growth has been outstanding. In the past three years, the dividend growth rate has been 56.57% (three-year CAGR). Looking at their portfolio and revenue growth trajectory, I expect their dividend to continue to grow, even though it will not be at 50% per year level.

The dividend payment is safe at this point, well demonstrated by a cash dividend payout ratio of 30.0% and AFFO payout ratio of 23.81%.

SBA Communications has a strong balance sheet to support their long-term growth. The leverage ratio is at 6.8x, and net cash interest coverage ratio is at 5.3x. Net secured debt leverage ratio is at 5.1x.

With this strong balance sheet and solid operation, I expect SBA to continue executing their growth plan well. SBAI is a HOLD (barely).

Risk…

As many of us know and expect, a recession may hit the U.S. and the rest of the world later this year. There is no consensus on the magnitude and the length, but just about everyone is forecasting a gloomy 2023.

On top of that, some of the tech giants like Amazon (AMZN) and Google (GOOG) (GOOGL) announced layoffs in their work force, and that adds more pressure to the market.

If a recession hits, customers may choose to cut down on their mobile phone expenses, and the reduced usage may impact the Cell Tower REITs performance negatively.

One of the main anticipated growth drivers for cell tower REITs is the adoption of the 5G network. The global 5G service market size was valued at $60 B in 2022, and some experts are expecting it to grow at 59.4% per year.

However, the growth of the network depends on many different factors like government investment, corporate investment, and people’s data usage trend, so this also depends on the global economy and there’s plenty of uncertainty over how quickly growth will occur. Investors should pay close attention to the market and industry climate.

Conclusion

People are using more and more data on their smartphones, driving rapid growth in total data usage. Also, more and more appliances and devices are being connected to the wireless network, and this trend will only grow in the future.

Investing in the Cell Tower REITs that own and operate the infrastructure of the telecommunication companies is one great way to take advantage of these trends.

The three companies in this article are leaders in the space, have strong balance sheets, and are doing a great job at executing their operation plan. They’re in great positions to take advantage of this trend.

Investors should take a look!

Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.