SpaceX Could Be a Game Changer for These 2 Dividend Stocks

Earlier this month, SpaceX agreed to purchase a low-band spectrum portfolio from private equity firm Grain Management for $8 billion. This spectrum improves range and allows signals to penetrate through walls and tree cover. It put the company a step closer to launching a mobile service in the U.S.

Now, the company is reportedly taking another step toward that strategy by seeking to secure space on telecom towers. According to a Bloomberg report, SpaceX is looking for access to 80,000 cell tower sites in the U.S. That report noted it’s in talks with Crown Castle about space on its tower network. The REIT currently owns, operates, and leases about 40,000 sites across the U.S. American Tower is also a leading tower owner with 42,000 sites across the U.S. and Canada (and more than 106,000 properties in other international markets).

The REITs lease space on those towers to the country’s three national mobile carriers (Verizon, AT&T, and T-Mobile) and other customers. Adding a fourth national carrier would create a new source of demand for space on existing towers. That’s noteworthy because tower economics significantly improve with each additional tenant. Due to the high fixed costs of building a tower, the return on investment for a single-tenant lease is low, but increases exponentially with each additional tenant. For example, a sample tower economics model in an American Tower investor presentation shows a 3% return on investment for a single tenant, 13% for two tenants, and 24% for three tenants.

However, there’s no guarantee that SpaceX will sign definitive leasing agreements. According to an estimate by TD Cowen, it would cost more than $80 billion to build out a nationwide network. That’s a massive capital outlay for a company that’s already spending heavily on AI and space. It could partner with an existing carrier, such as T-Mobile.

Two dividend stocks that could benefit

Still, if SpaceX did need space on 80,000 U.S. towers, that would provide a major boost to the country’s top infrastructure REITs. Crown Castle has the most to gain from this potential agreement, as it’s now the only pure-play U.S. tower REIT after selling its fiber and small-cell assets earlier this year in an $8.5 billion deal. The company believes the sale will put it in a stronger position to become a best-in-class operator in the U.S. market, which it believes is the strongest in the world.

The company is currently experiencing a decline in customer demand for space on its towers. T-Mobile’s 2020 merger with Sprint has been a headwind for Crown Castle, as the larger carrier has been consolidating its tower leases. Additionally, DISH Network abandoned its plan to build a nationwide 5G network and is also canceling leases. That has been weighing on site rental revenue, which declined 4% in the third quarter. A new SpaceX lease would help offset this lost revenue. That could put Crown Castle in a position to begin rebuilding its dividend (currently yielding 5%), which it cut after selling its fiber and small-cell assets.

American Tower could also benefit from SpaceX’s entry into the U.S. wireless market. While it has faced the same Sprint and DISH headwinds as Crown Castle, its more diversified platform, which includes U.S. data centers, has helped offset them. Its total property revenue was up 6% in the third quarter, thanks in part to its data center platform benefiting from the AI boom, with record leasing. That has enabled it to continue growing its dividend (nearly 4% current yield). A tower deal with SpaceX would only further enhance its already solid growth.

Which dividend stock looks more attractive?

SpaceX’s potential expansion into the U.S. wireless market could provide a significant boost to the country’s largest cell-tower owners. Crown Castle might have more upside from a potential agreement because of its concentrated U.S. footprint. However, American Tower offers investors a more diversified growth platform that doesn’t depend as heavily on a SpaceX deal materializing. That’s why I’d lean toward buying American Tower if I were choosing between the two.

Matt DiLallo has positions in American Tower, Crown Castle, and Verizon Communications. The Motley Fool has positions in and recommends American Tower and Crown Castle. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.