Crown Castle (CCI +4.81%) has hit a speed bump. Higher interest rates, consumer consolidation, and reduced customer capital spending will slow its earnings growth rate to a crawl this year. These headwinds will probably affect its earnings over the next couple of years, with the result that the mobile infrastructure company sees dividend growth below its target of 7% to 8% annually over the next few years.
However, the infrastructure REIT expects growth to eventually reaccelerate. Patient investors stand to collect an attractive dividend -- it currently yields 5.9% -- with an equally attractive long-term upside potential.
NYSE: CCI
Key Data Points
Battling a barrage of headwinds
Crown Castle recently updated its outlook for 2023. The REIT expects to produce between $7.50 and $7.58 per share of adjusted funds from operations (FFO) this year. That's down $0.09 per share from the midpoint of its previous guidance range. At the new midpoint, adjusted FFO would rise by only about 2% this year, down from 3%. That's a significant slowdown from the 6% growth it achieved last year.
The merger between T-Mobile and Sprint led that company to consolidate some of its infrastructure by canceling small cell and fiber solutions leases. That will affect Crown Castle's revenue in the near term. Meanwhile, rising interest rates increased the interest expense on its floating-rate debt. On top of all that, the company now anticipates slower tower leasing activity in the second half of the year as mobile carriers pull back on spending to improve their cash flow.
These issues aren't unique to Crown Castle. Fellow infrastructure REIT American Tower (AMT +1.58%) expects its adjusted FFO to decline by about 1.1% this year. In addition to higher interest rates and the T-Mobile lease cancellations, American Tower has battled foreign exchange fluctuations in its international tower business.
These headwinds have weighed on their share prices. American Tower's stock price has fallen nearly 35% from its 52-week high, while Crown Castle's has plunged 42% from its peak. Those sell-offs have driven up their dividend yields; Crown Castle is up to 5.9%, while American Tower's payout is 3.4%.
NYSE: AMT
Key Data Points
Better days lie ahead
Crown Castle expects that its current headwinds will eventually fade. That will enable it to experience the full benefits of the long-term 5G tailwind driving growing demand for mobile infrastructure. Those tailwinds are driving robust growth in its core businesses. Crown Castle expects 5% organic tower growth, 10,000 small cell node deployments, and fiber solutions growth returning to 3% by the end of this year.
The company believes the best is yet to come. CEO Jay Brown stated in the second-quarter earnings release that the company "continue[s] to be excited by the long-term opportunity ahead with the majority of the 5G deployment in the U.S. still to come." He added:
Longer term, as our customers spend to meet the significant increase in mobile data demand in the U.S, we have visibility to continued growth in our core business, with 75% of our expected 5% annual tower organic growth contracted through 2027 when normalized for the previously disclosed legacy Sprint rationalization in 2025. Augmenting that growth, we anticipate double-digit annual revenue growth in our small cell business over the next several years as we execute on our existing small cell backlog of 60,000 nodes.
The eventual normalization from its T-Mobile/Sprint headwinds, along with continued strong tower growth and robust small cell growth, should reaccelerate earnings growth in the future. This outlook provides "support for our expectation of returning to our long-term annual dividend per share growth target of 7% to 8% beyond 2025," according to Brown. Meanwhile, the company's near-term headwinds don't mean it won't grow its dividend in the interim. It increased its payout by 6.5% late last year and could deliver dividend growth in line with its adjusted FFO over the next few years.
Get paid well while awaiting the reacceleration
Crown Castle's headwinds will affect its ability to achieve its targeted dividend growth rate over the next few years. However, the REIT fully expects to get back on track with its dividend growth target after 2025. Meanwhile, slowing growth won't affect the company's ability to maintain its high-yielding payout in the near term. That makes it an attractive option for patient investors who can earn a nice income stream with compelling long-term upside potential.
