When Bill Gates makes a move, people take notice.
Gates struck it rich during the software revolution. As the founder and main force behind Microsoft (NASDAQ:MSFT), he built a fortune worth of over $86.0 billion.
Today, the tech entrepreneur owns a sprawling investment empire through his charity The Bill and Melinda Gates Foundation. In recent years, Gates has hit homerun returns in stocks like Ecolab Inc. (NYSE:ECL), Waste Management Inc (NYSE:WM), and Canadian National Railway Co (NYSE:CNI). With connections throughout the business world, he has managed to get ahead of a number of big financial trends.
Because of that kind of a track record, I always track Gates’ portfolio moves. And right now, he’s quietly making a huge bet in one little-known dividend stock: Crown Castle International Corp. (NYSE:CCI). Income investors should pay attention.
Up 593%... and Just Getting Started
Crown Castle operates a pretty lucrative business, to begin with.
The real estate investment trust owns approximately 40,000 cell phone towers across the country. Management rents these sites out to mobile carriers in exchange for steady, ongoing rent payments.
According to rival American Tower (NYSE:AMT), a new communication site costs $275,000 to build. A single tenant pays $25,000 per year. After operating expenses, that comes out to a capitalization rate of 3% annually.
The magic moneymaker here comes from operating leverage. It costs almost nothing to install a set of carrier equipment at an existing site. And each tower can accommodate up to six tenants.
With two tenants on a tower, the capitalization rate jumps to 13%. With three tenants, this figure jumps to 24%.
On average, Crown Castle has 2.2 tenants per tower. Moreover, the typical carrier has six years left remaining on their site lease with built-in rent hikes each year. So no matter which mobile phone becomes a hit with consumers, this business will get its slice of the action.
For shareholders, this has translated into jaw-dropping returns. Over the past decade, Crown Castle has delivered a total return, including distributions, of 593%. That crushed the gain from the broader S&P 500, which returned only 211% during the same period.
And this could be just the beginning.
In the tech business, everyone wants to talk about the rollout of fifth-generation, or 5G, technology. The new mobile network promises to boost browsing speeds 100-fold and cut latency times (how long it takes for your cell phone signal to send messages to a tower) by 90%.
The implications of 5G, however, go far beyond your cell phone. The technology will serve as the foundation for the much-hyped “Internet of Things” - the connection of everyday devices from cars and lamp posts to trash cans and water pipes to the internet. Tech analysts believe 5G represents the missing technology needed for the introduction of “smart cities” and self-driving cars.
This could result in an explosion of mobile data consumption. In 2019, telecom giant Ericsson predicts total mobile traffic in the United States will top 5.0 exabytes per month - enough data to store all of the words ever spoken by human beings. By 2023, this figure could hit 20.4 exabytes per month.
The only problem could be the mobile network itself. 5G signals only travel a fraction of the distance of earlier generations. As a result, carriers will have to add thousands of tower sites to their networks.
Great news for businesses like Crown Castle. As one of the country’s largest owners of mobile communication sites, the company has seen a huge increase in demand for new tower setups. That has allowed management to raise rents at existing facilities, in addition to reporting record low vacancy rates.
“Mobile data traffic in the U.S. is expected to grow five-fold from 2017 through 2022. To put that growth into perspective, that means mobile data traffic in 2022 is expected to be equal to 12 times the volume of all Internet traffic in the U.S. in 2005,” CEO Jay Brown told investors in a recent conference call. “[...] our customers continue to invest heavily in their 4G networks to keep pace with data demand growth from existing technologies, while the deployment of 5G is just getting started.”
And this investment has started to show up in Crown Castle’s financial results.
Last quarter the company reported site rental revenues jumped 15% to $1.2 billion, crushing Wall Street’s expectations. Management also raised their guidance for the upcoming year, signaling an enormous amount of confidence in the business.
This has created a lucrative income stream for unitholders. Since Crown Castle issued its first payment in 2012, management has more than tripled the size of the distribution. Today, the partnership pays a quarterly dividend of 1.125 per unit, which comes out to an annual yield of 3.8%.
That payout will likely continue to grow, too. Over the next five years, analysts project Crown Castle’s earnings will grow at a 21% compounded annual clip. Given the partnership’s modest payout ratio, investors can expect the distribution to grow more or less in line with profits.
The big risk here? Consolidation.
Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) have pushed to combine their operations. A larger carrier will give them more heft at the negotiating table and reduce their need for many tower sites.
Needless to say, that would spell bad news for Crown Castle. That said, the growing size of the mobile pie should more than offset any losses from carrier consolidation. Moreover, the market has had more than a year to price this development into unit prices.