Finding stock price growth and solid income generation in a single stock is often quite difficult for investors. Many higher-yielding stocks are often value traps because growth is declining and the dividend is at risk of being cut. Meanwhile, high growth often involves outsized investment for growth which reduces funds available for dividends. But there are those rare stocks out there that offer a decent (and sustainable) yield along with a long-term stock price appreciation story involving several years of growth.
The rare stock being featured today accomplishes this dual mission by tapping into a sustained global trend — the increased use of mobile data. One of the leaders in the space is real estate investment trust (REIT). Crown Castle (CCI 0.37%).
Crown Castle is a global leader in cellphone towers
Crown Castle is a leader in shared communications infrastructure. The company operates more than 40,000 cellphone towers and other structures as well as 85,000 route miles of small cell networks.
The communications infrastructure industry is highly concentrated, with the market dominated by Crown Castle and American Tower (AMT 1.13%)along with SBA Communications (SBAC 0.92%). If you drive along the highway and see a humongous fake pine tree in the distance that fools no one, you are looking at a cellphone tower that was probably installed and operated by one of these three companies.
Telecom companies, government agencies, and cable companies all lease space on these towers under long-term contracts with automatic rent escalators.
Crown Castle’s business is being driven by the ever-increasing demand for mobile data. According to one study, such demand is set to triple between the end of 2022 and 2028, which represents a cumulative average growth rate of 21%. Much of this will come from 5G, which is expected to grow from 17% of all traffic at the end of 2022 to 69% at the end of 2028.
The small-cell rollout will drive Crown Castle growth
The rollout of 5G will require a massive deployment of small cell networks, which use low-power, short-range wireless transmission systems. These are small transponders that will help increase data capacity; the devices can be attached to a wall and are about the size of a pizza box.
Crown Castle deployed 5,000 small cells in 2022, and the company foresees deploying another 5,000 in 2023. The company said on its earnings conference call that it has another 60,000 small cells contracted in the backlog.
And small cell networks aren’t the only longer-term growth opportunity. Capital upgrades to established towers will be needed to support the national rollout of 5G.
The company just reported better-than-expected earnings, and it is trading at a reasonable multiple and yield. For the full-year 2022, Crown Castle reported a 10.2% increase in revenue to just under $7 billion. Adjusted funds from operations (AFFO) per share rose 6.2% to $7.38.
REITs generally prefer to use FFO instead of net income as reported under generally accepted accounting principles (GAAP). This is because depreciation and amortization are major expenses for real estate companies but aren’t a real “cost” in that the companies don’t write a check for it. It is an accounting convention, and deducting it underestimates the cash-flow capacity of the business.
Crown Castle offers a great combination of growth and income
Crown Castle is guiding for 2023 AFFO to come in between $7.58 and $7.68 per share. This is a 3.4% increase compared to 2022. At current levels, this gives Crown Castle a price-to-AFFO-per-share ratio of 19.1, which is reasonable for a REIT in such a competitive position. The company recently bumped up its quarterly dividend by 6.4% and has a dividend yield of 4.3%.
Like many other REITs at the moment, Crown Castle is seeing some short-term stock price correction related to market concerns about the increase in interest rates over the past 10 months. Higher interest rates impact the borrowing that all REITs rely on as part of their investment model. Once interest rates level off and the REIT adjusts to the new norms, the stock should return to its growth trajectory that generated 105% growth over the past decade.
Crown Castle has a great combination of a long-term growth story and a nice yield. It could satisfy an income investor’s need for growth.
Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Tower and Crown Castle. The Motley Fool has a disclosure policy.