Crown Castle International Corp (NYSE:CCI) only began paying dividends in 2014, but the company currently offers income investors a high dividend yield near 4% with 6-7% annual dividend growth potential.
Crown Castle also has an attractive business model with substantial recurring revenue, excellent free cash flow generation, and extremely high incremental margins.
Crown Castle was a popular stock during the first quarter among the investors tracked by Insider Monkey. 47 of them were long the stock, up from 38 at the beginning of the quarter. Those 47 investors held 6.4% of the company’s outstanding shares on March 31, valued at $1.85 billion. The family office of legendary investor George Soros was one of the firms that opened a new stake in Crown Castle during the first quarter; the position amounted to 354,519 shares at the end of March.
Let’s take a closer look at Crown Castle’s business for consideration in our Top 20 Dividend Stocks portfolio.
Business Overview
Crown Castle began operating as a real estate investment trust (REIT) in 2014 and is the largest provider of shared wireless infrastructure in the country.
Crown Castle owns approximately 40,000 towers and 16,500 miles of fiber supporting small cell networks.
The company leases its towers out to wireless carriers, which need Crown Castle’s infrastructure to provide wireless services to consumers and businesses.
Tenants deploy communications equipment, coaxial cables, and antennas at the top of Crown Castle’s towers that transmit signals between the tower and mobile devices. Most towers have capacity for at least four tenants.
The big four wireless carriers account for 90% of Crown Castle’s revenue, and the company is completely focused on the U.S. wireless market, where over 70% of its towers are located in the top 100 largest markets.
Over 80% of the company’s revenue is recurring, and most of its site rental revenue results from long-term leases with initial 10-year terms and five-year renewal periods thereafter.
Business Analysis
Despite its customer concentration, Crown Castle’s business model is attractive for a number of reasons, beginning with its predictability.
The company has an average remaining customer contract term of six years and approximately $20 billion remaining in contracted lease payments (compared to $3 billion in 2015 site rental revenue), providing excellent cash flow visibility.
Crown Castle’s leases also have built-in price escalators, which are expected to continue adding around 3% to the company’s annual earnings growth.
In addition to annual rent escalators, tower economics are also attractive because very little cost is involved to add additional tenants.
A recent investor presentation by Crown Castle highlighted that the company enjoys a 96% incremental margin when it adds an additional tenant to one of its existing towers.
In other words, if a new tenant brings in $25,000 of additional rental revenue, Crown Castle keeps $24,000 in gross profits. The operating leverage in this business is tremendous, and substantially all of Crown Castle’s wireless infrastructure can accommodate additional tenancy.
As data growth continues accelerating, it seems reasonable that demand for Crown Castle’s wireless infrastructure will also rise over time.
Carriers have no substitutes for wireless infrastructure, which is mission-critical for their businesses to operate.
Additionally, by collocating on shared wireless infrastructure, wireless carriers only have to pay for their proportional usage of the infrastructure.
Instead of needing to occupy an entire company-owned tower themselves, carriers can rent only the space they need to enhance their network coverage and continue servicing their customers.
As a result of these factors, tenant leases have historically enjoyed a high renewal rate. Non-renewals have averaged just 2% of site renewal revenues over the last five years.
