Guest Contribution By Tom Hutchinson, Chief Analyst, Cabot Dividend Investor
You’ve probably heard the term 5G. It is the latest, or “fifth generation,” of cellular wireless technology currently in the process of being rolled out. But it’s way more than just some incremental generational cell phone advancement. It is a game changer that will thrust the world into a new age.
A new generation rolls around every 10 years or so, from the first one that enabled cell phones in the first place to the third and fourth generations that enabled smartphones and mobile data. Each generation marks an improvement in speed and latency, the amount of time it takes devices to communicate with each other. This generation is projected to add massive speeds, up to 100 times faster, and internet connectivity with far superior speed, scope and scale.
The implications go well beyond phones. It is a crucial tipping point of critical mass. 5G enables virtually instantaneous internet connectivity, providing the technology for a new range of advancements like self-driving cars, robotics, artificial intelligence, smart cities and much more. To this point the digital age was like a dirt road. It’s now about to become a 10-lane highway with speed rails and air traffic. You ain’t seen nothin’ yet.
How important is it? It is such a game changer that it is considered a national security imperative. It is a big part of the struggle for dominance and power with China. The U.S. National Security Council has warned that if China gets 5G first it “will win economically and militarily.” In fact, 5G technology is considered so crucial that the FCC streamlined the rules so that the 5G rollout can continue in haste.
5G is infrastructure. Every new generation requires more and better cell towers and supporting structures. This new generation requires even more because, although it provides great speeds and power, it doesn’t have the cell signal range of previous generations. Therefore, it requires more towers and supporting technologies to increase the range and relieve congestion.
Aside from the major cell phone providers, there are three big players in 5G infrastructure, and they’re all REITs.
It’s a business that provides both growth, with the 5G rollout, and defense, as the rollout will continue rain or shine in a good economy or a bad one. Right now, these 5G technology REITs are an incredible opportunity for income investors.
Dividend Growth REIT #1: American Tower Corp. (AMT)
American Tower is the largest U.S. cellular infrastructure REIT. It owns and operates 187,000 cell towers, 43,000 in the U.S. and over 140,000 abroad, primarily in India and Brazil. And it’s growing– it added 20,000 cell towers in 2018. It leases these towers to cellular service providers under long-term contracts, acting as a mobile technology landlord.
Business is good–the stock has blown away both the returns of the overall market as well as its REIT peers. AMT has provided a better than 26% average annual return over the past three years. It is benefiting in the U.S. from the voracious demand with the 5G rollout as well as in emerging markets as low-cost smartphones proliferate at a torrid pace.
Not only is the business very profitable right now, it’s also defensive. The REIT grew revenues by 6% even in the pandemic-stricken 2020. It looks like it’s back to regular business this year as the REIT has returned 27% YTD. It is also forecasted to grow earnings at about a 20% per-year clip over the next five years. That’s serious growth for a REIT.
Dividend Growth REIT #2: SBA Communications (SBAC)
SBA is the smallest of the cellular infrastructure REITs with more than 32,000 cell towers in North, Central and South America. It has a huge presence in Brazil but generates about three quarters of revenue in the US.
It has essentially the same business model as AMT, in that it leases space on its towers to cellular service providers under long term contracts. The key differentiating point is size, which is both a blessing and a curse. It’s much smaller than the other two REITs. On the downside, all the earnings go back into growth and only pays a small dividend, currently yielding 0.69%.
On the positive side, the upside is juiced. Smaller companies can generally grow faster. Performance has been better than AMT. While AMT is forecasted to grow earnings by about 20% over the next five years, SBA is projected to grow at a better than 100% annual clip. It’s really a growth stock disguised as a REIT. But it’s in the right place at the right time.
Dividend Growth REIT #3: Crown Castle International (CCI)
Crown Castle International Corp. leases a portfolio of properties that currently includes 40,000 cell towers, 80,000 small cell towers and 80,000 miles of fiber optic cable primarily to the four largest wireless service providers in the U.S.
It has the same basic business model as the other two, but I like this one best for several reasons. For one, it actually pays a decent dividend, currently a 2.77% yield. Another reason is that it operates exclusively in the U.S. The 5G story is so good that I don’t want to risk any crazy emerging market shenanigans messing things up. But perhaps the most important advantage is the small cells.
The current 5G buildout plays right into Crown Castle’s hands. Although speed and latency will improve by staggering amounts, this generation lacks something previous ones had – range. A 5G signal only travels about half a mile, compared to several miles for earlier generations. That means that small cell towers will be needed all over the place in order to increase the range and relieve congestion.
Crown Castle is the small tower king. Small towers are about the size of a pizza box, and will soon decorate almost every street corner. AT&T claims that 300,000 new small towers will be needed for 5G. Only 220,000 currently exist. Crown Castle already owns 80,000 (more than any other company in the country) and has signed multi-billion dollar contracts with the four largest cell providers (Verizon, AT&T, Sprint and T-Mobile) to provide more.
The proof is in the pudding. CCI has outperformed the other two REITs during the 5G rollout, for the past two-year, one-year and YTD periods. Crown Castle is also projected to grow earnings by an average annual rate of over 20% for the next five years.