Crown Castle (CCI -1.62%) pays a towering dividend. The real estate investment trust (REIT) focused on data and communications infrastructure yields more than 5%. That puts it near the top of the S&P 500, where the average dividend yield is less than 1.5%.
Crown Castle had been growing its payout at a healthy clip until pressing pause a couple of years ago because of several headwinds. The infrastructure REIT had planned to restart its dividend growth engine next year. However, a potential sale of its fiber and small cell assets could instead lead the REIT to reset its dividend.
An ill-fated move
Crown Castle is one of the largest cell tower operators in the country, having over 40,000 sites. It's right behind rival REIT American Tower (AMT -1.60%), which owns 42,000 tower sites in the country. Where the two infrastructure REITs differ is in their other assets. American Tower focused on international expansion and data centers. It owns 224,000 global sites and 28 data centers in the United States. Crown Castle focused on other U.S. data infrastructure assets by investing heavily in building fiber and small cell platforms.
The REIT has 115,000 small cells and 85,000 route miles of fiber. It built those platforms with $10 billion in acquisitions and $8 billion in organic capital spending.
However, those investments haven't paid off as the company expected, and now it's evaluating the potential sale of those businesses. According to a recent report by Reuters, at least two interested parties are competing to buy those assets from the company in a deal that could be worth $8 billion to $10 billion, with each business valued at less than $5 billion. That's nearly half the cost the company incurred to build these platforms and well below the $15 billion value initially anticipated.
Where's the growth?
Crown Castle's strategy has been to invest capital into growing its tower, fiber, and small cell platforms to participate in the growing demand for data infrastructure as mobile carriers expand their 5G networks. The company expected those investments would support its long-term target of growing its dividend by 7% to 8% annually, which it hoped to resume after 2025.
However, selling its fiber and small cell platforms would affect its cash flow. While the company could offset some of that by using the proceeds to repay debt and reduce interest expenses, the lower-than-expected valuations would lessen that impact.
Meanwhile, it would leave the company with less long-term growth potential. It would need to solely rely on expanding its U.S. tower business. While mobile carriers are upgrading their networks to support 5G, which would enable the REIT to add tenants to existing sites, the industry doesn't need to build a lot of new towers. Meanwhile, acquisition opportunities are also limited. The company recently passed on one expansion opportunity as Verizon reached an exclusive deal that provides Vertical Bridge the rights to lease, manage, and operate 6,339 towers for 10 years. The $3.3 billion deal was the largest in the U.S. tower sector in nearly a decade, showing how rarely these opportunities come along.
The limited growth prospects of the U.S. tower sector led the company to pivot toward fiber and small cells in the first place to accelerate growth. Likewise, American Tower shifted its focus overseas, where it bought up towers around the world. It more recently added a U.S. data center platform to further enhance its growth profile.
Too high risk right now
Crown Castle offers a towering dividend yield, but that payout might not be sustainable if it sells its fiber and small cell assets, making it too risky for income investors right now. A much better option is rival American Tower. While it has a lower dividend yield, at less than 3%, the REIT has a stronger financial profile and better growth prospects. Its dividend should head higher in the future, enhancing its total return potential.
