The goal of investing is to harness the power of compound interest to set yourself up for a bright financial future. You can do this by focusing on buying stocks with promising long-term growth potential.
The communications infrastructure real estate investment trust (REIT) Crown Castle International (CCI 0.55%) looks to fit the criteria laid out above. Here's why Crown Castle could help you to retire as a millionaire.
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The path to $1 million for investors
A $10,000 investment in Crown Castle when the stock had its initial public offering (IPO) in 1998 would have blossomed into $188,000 by now with dividends reinvested. That works out to a compound annual growth rate of 13.3%. Had an investor allocated just over $53,000 of capital to Crown Castle shortly after its IPO and reinvested dividends, they would be a millionaire today from that investment alone.
And the stock has actually compounded faster in recent years than in its earlier years, which suggests that it has plenty of room to run yet. This is evidenced by the 18% annual returns that Crown Castle has generated over the last 10 years.
If Crown Castle were to deliver 18% annual returns over the next 28 years, the stock could turn a $10,000 investment into $1 million.
A reliable business model with room for growth
But is it realistic to expect Crown Castle to produce 18% annual returns for nearly three decades? To answer this question, let's first get a better understanding of Crown Castle's business model and growth prospects.
Crown Castle has been at the forefront of the digital revolution that has taken place over the last few decades. The company owns more than 40,000 cell towers and approximately 80,000 route miles of fiber throughout the U.S. As a result of Crown Castle's vast communications infrastructure network, the company is the second-largest cell-tower owner in the world behind American Tower (AMT 1.80%), with a market capitalization of $76 billion.
Crown Castle's infrastructure is leased out to large telecoms like Verizon on contracts that typically have initial terms of 10 years. Better yet, those contracts for the right to use Crown Castle's infrastructure come with 1.5% to 3% annual lease escalators built into them, which translates into revenue and earnings stability with steady growth to boot.
What's even more encouraging for Crown Castle's future growth prospects is the trend of mobile data consumption. Analysts are forecasting that the average mobile-data user's monthly consumption will quadruple from 11.8 gigabytes (GB) in 2020 to 49 GB by 2026.
What's behind these assumptions? Just as the fourth generation of mobile wireless communication catapulted the emerging video streaming technology into the mainstream, the same will likely be true for 5G. Immersive technologies like virtual reality and augmented reality should lead to significantly higher data consumption, which 5G will be able to meet. More cell towers and route miles of fiber on top of annual increases in rent paid to Crown Castle should lead to at least high-single-digit annual adjusted funds from operations (AFFO) per share growth in the years ahead.
This AFFO per share growth paired with Crown Castle's manageable dividend payout ratio just below 80% for 2021 means that its 7% to 8% annual dividend growth target is a realistic goal for the company. Given that Crown Castle's dividend yield is a market-beating 3.4%, the stock offers an attractive combo of yield and growth potential.
Crown Castle is a buy right now
Based on Crown Castle's current $174 share price and midpoint AFFO per share guidance of $7.36 for 2022, the stock is priced at an AFFO per share multiple of just under 24. This is arguably a fair valuation to pay, considering Crown Castle's growth tailwinds.
Crown Castle likely won't be able to replicate its 18% annual returns over the past decade due to the law of large numbers. But a 3.4% dividend yield and 8% annual AFFO per share growth should lead to annual total returns of around 11% over the long haul.
If an investor has the time to let compounding do the heavy lifting, a single $10,000 investment today in Crown Castle could become $1 million in 44 years at an 11% annual total return rate. Thus, Crown Castle could mint quite a few millionaires in the decades ahead, especially if investors set aside more than $10,000 initially or regularly dollar-cost average into the stock.
