Pinpointing quality dividend-growth REITs in the current market environment has become quite a challenging task. However, the exception here are specialized cell tower REITs, whose infrastructure-type physical properties offer unique qualities in the current, highly uncertain environment. Simultaneously, their valuations appear reasonable, and their dividend-growth prospects remain strong. Two of my favorite picks in the space are SBA Communications (NASDAQ: SBAC) and Crown Castle (NYSE: CCI).
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These stocks are likely to serve dividend-growth investors quite satisfactorily moving forward. As a result, I am bullish on both stocks.
Other classes of REITs are not as appealing currently. Think about it: retail properties continue to show occupancy gaps in the post-COVID era, while their dividend-growth prospects are gloomy. In addition, commercial properties remain under pressure as hybrid working conditions have become the new norm, reducing demand for plentiful office space.
Residential properties are also about to come under pressure, with interest rates on the rise, as mortgage rates have already skyrocketed. Industrial properties such as logistics continue to report robust results. However, they are quite overvalued in the current environment, in my view. Therefore, let’s take a look at SBAC and CCI.
What Makes SBAC’s and CCI’s Business Models Resilient?
To understand why SBA Communications’ and Crown Castle’s dividend-growth prospects remain robust, we have to highlight the qualities attached to their business models.
In fact, the two tower REITs feature several competitive advantages along with their handful of industry peers, which have formed an oligopoly in the space. With just a few participants in the market and an extremely capital-intensive area of operations, it’s practically impossible for new potential competitors to penetrate into the industry.
Additionally, in contrast to various categories of REITs, whose tenants may find it difficult to meet their obligations amid a tough economic period, similar to retailers during the pandemic, telecom giants produce resilient financials at all times.
Companies like AT&T (NYSE: T) & Verizon (NYSE: VZ), which are the biggest tenants of tower REITs, enjoy resilient cash flows due to the necessity-type and mission-critical core of telecommunications, which in turn ensures no blow on SBA Communications’ and Crown Castle’s performances during challenging market environments. If that’s not enough, keep in mind that telecommunication giants are publicly-traded companies with transparent financials and ironclad creditworthiness.
Therefore, tower REITs essentially face no counterparty risks. This, combined with the fact that multiple antennas can be attached to each tower and that long-term leasing contrasts are usually signed with rate escalations embedded, results in predictable financials.
Thus, SBA Communications and Crown Castle can implement long-term dividend-growth planning. This was proven during the pandemic when both companies’ results kept climbing higher despite the underlying challenges most other REITs were facing at the time.
SBAC and CCI’s Dividend-Growth Prospects
SBA Communications is a relatively new dividend grower, with the company declaring its first dividend in 2019. Since then, payouts have been proliferating, with the underlying operating cash flows offering plenty of room for aggressive hikes to continue taking place. The most recent hike occurred last February and was by 22.4% to a quarterly rate of $0.71.
Taking into account SBA Communications’ present financials and growth momentum, management can afford to continue raising the dividend by an average rate of around 20% over the medium term without threatening coverage.
To add some color here, even subsequent to its most recent substantial dividend hike, the stock’s payout ratio hovers close to 23.5%, according to management’s estimated AFFO/share forecast of $12.06 (the midpoint) for the full year. Thus, despite lacking a longer dividend-growth track record, I am confident in the company’s dividend-growth prospects.
Crown Castle features a lengthier dividend-growth track record, with hikes occurring annually since 2014. Excluding the massive increase between 2014 and 2015, the dividend per share has been raised annually at a CAGR of 8.51% since. Surprisingly, the latest hike even accelerated the pace, as it was by 10.5%. Management’s long-term dividend per share raise rate target per annum hovers between 7% and 8%. However, what is meant by “long term” here is a bit imprecise.
In my view, the dividend could even grow at a more aggressive rate. FFO/share is set to grow by north of 20% this year. Thus, dividend growth could be comfortably sustained at least in the double digits over the next few years. The midpoint of management’s guidance suggests a smooth payout ratio of around 80% as well.
What are the Price Targets for SBAC and CCI Shares?
Turning to Wall Street, SBA Communications has a Moderate Buy consensus rating based on eight Buys and three Holds assigned in the past three months. At $379.55, the average SBA Communications stock forecast suggests 23.4% upside potential.
Analysts have quite similar upside potential expectations for Crown Castle. The stock has a Moderate Buy consensus rating based on nine Buys, two Holds, and one Sell assigned in the past three months. At $194.91, the average Crown Castle stock forecast implies 20.6% upside potential.
Conclusion: Two Reasonably Valued Dividend-Growth Opportunities
Besides their previously mentioned qualities and attributes, I believe that SBA Communications and Crown Castle are two reasonably valued dividend growth opportunities. Again, by employing the midpoint of both managements’ FFO/share estimates for the year, SBAC and CCI shares are trading at a P/FFO of 25.5x and about 22x, respectively, at their current price levels.
These multiples may appear elevated in the current market environment. However, considering that both FFOs and dividends are likely to keep expanding in the double-digits on a per-share basis over the medium term with minimal risks, I would argue they are quite justified.
Both companies feature unique traits and a wide moat in the industry. Thus, I don’t believe investors will have the opportunity to cherry-pick the stocks at multiples notably lower than their current ones.
