This Dividend Stock With a Nearly 7% Yield Is a Buy After Selloff

Crown Castle has taken it on the chin in 2024: The shares of this narrow-moat REIT focusing on shared communications infrastructure have tumbled 17% this year. Although this undervalued dividend stock will remain sensitive to interest-rate movements in the short term, we’re bullish on its long-term prospects. Specifically, we’re enthusiastic about the company’s improved monetization of its fiber segment and the installation of a new CEO—and its sizable yield should appeal to dividend stock investors. Crown Castle is on our analysts’ list of the top 33 undervalued stocks this quarter.

Crown Castle has a different strategy than its two biggest competitors, which focus almost solely on towers and have a multinational footprint. Crown operates exclusively in the United States and has aggressively invested in fiber to pursue small cell communications sites. After years of disappointment and sucking up capital, the small cell business appears to be past the point of destroying value, making it much more attractive to operate or to sell. Crown’s legacy tower business is fantastic. For at least the past decade, Crown has held steady with about 40,000 towers in its portfolio, meaning this business has required very little incremental capital investment, and absolute tower operating costs have risen only modestly. Cash sales, on the other hand, have grown at a mid-single-digit rate annually. Costs to operate a tower are largely fixed, so as more tenants and equipment get added to towers, Crown benefits from significant operating leverage.

Key Morningstar Metrics for Crown Castle

• Fair Value Estimate: $130
• Star Rating: 4 Stars
• Economic Moat Rating: Narrow
• Uncertainty Rating: Medium

Economic Moat Rating

We don’t see competitive advantages in Crown Castle’s fiber business, but towers, which accounted for 68% of companywide revenue in 2023, are protected by switching costs and efficient scale and are unlikely to be uprooted by competition. Additionally, Crown has now brought fiber spending down significantly, so we no longer think returns on invested capital will fall below its weighted average cost of capital for the bulk of the next 10 years. In our view, the moat in Crown’s tower business is underpinned by the efficient scale present in the tower industry and switching costs that make tenants reluctant to seek alternative providers once they have installed their equipment on towers. The overriding feature of the tower business is the extreme operating leverage. Costs to the tower provider are mostly fixed per tower, meaning costs to operate a tower are virtually the same whether it has one tenant or multiple tenants.

Read more about Crown Castle’s moat rating.

Fair Value Estimate for Crown Castle Stock

Our $130 fair value estimate implies price/adjusted funds from operations and enterprise value/adjusted EBITDA multiples of 19 based on our 2024 estimates. Adjusted for Sprint churn that will affect revenue growth through 2025, we project Crown Castle to average nearly 5% annual revenue growth throughout our 10-year forecast. We project both gross margin and EBITDA margin to rise nearly 300 basis points between 2023 and 2032. We think operating leverage in the tower business and a higher proportion of co-located small cells will be responsible for the continued expansion. We expect capital spending as a percentage of revenue to decline through most of our forecast. After averaging 30% from 2017 through 2020, capital intensity dropped below 20% in 2021 and 2022. We expect a bump into the low 20s over the next couple of years, given the material uptick in small cell deployments. After 2025, we expect a gradual decline to about 16% by 2033.

Read more about Crown Castle’s fair value estimate.

Risk and Uncertainty

Crown Castle is allocating most of its recent spending to fiber and small cells, but towers continue to dominate its business, and they are very stable. While getting ahead of the curve on an industry transition to small cells could be very rewarding, we think it is a less competitively advantaged business and could prove detrimental. If Crown proves to not have the same competitive advantages in fiber as it has in towers, its investments could end up being value-destructive. The physical infrastructure it relies on makes its business prone to disruption from natural disasters, but we think the risk of widespread catastrophe is low right now. Another risk is that Crown leases, rather than owns, two thirds of its land and more than half of its towers.

Read more about Crown Castle’s risk and uncertainty.

Crown Castle Bulls Say

• Crown’s tower business runs on autopilot. It requires very minimal capital spending and is virtually assured of stable growth each year due to contractual rent escalators and mostly fixed costs.
• Small cells are poised to switch from a burden to a benefit, as the heaviest capital spending is past and new small cell deployments and sales growth are poised to rise materially.
• A pickup in carrier spending on its mobile networks is almost inevitable as rapid mobile data usage continues and 5G networks are not complete.

Crown Castle Bears Say

• Crown is spending too much on small cells, which have fewer competitive advantages and lower margins and returns on investment than towers.
• With two of the three major US wireless carriers owning significant amounts of their own fiber, Crown lacks a sufficient customer base to ever make its fiber very profitable.
• Crown’s big-city footprint makes its towers the most susceptible to small cell disruption. Even if Crown’s own small cell business is a major beneficiary, it is too small to offset a significant reduction in tower use.

This article was compiled by Susan Dziubinski and Sylvia Hauser.