Will the Data Boom Pay Dividends?

Consumer demand for digital broadband is growing quickly. When will investors cash in on the boom?

Consumer demand for digital broadband is growing quickly. When will investors cash in on the boom?
By + More

For investors who want certainty in their portfolio—and that includes virtually everyone—there is growing interest in the companies best positioned to cash in on the boom in social media and mobile computing: diversified media companies like AT&T and Verizon that offer broadband in all forms.

Still, the perils of investing in technology have never been better-illustrated than by Apple's slide over the past six months. High-tech products, even those with transformative properties, have a life cycle like the iPhone's apparent march toward middle age.

Meanwhile, providers of multimedia networks are feeling a surge in online demand as more people gobble up data and access social media and video over their smartphones. AT&T estimates demand for its wireless data has grown 20,000 percent over the past five years. Consulting firm Sandvine says data consumption more than doubled in the past year again, much of it from growing use of Netflix and other bandwidth-hogging video.

Not all of the growth hits the bottom line for telephone and cable companies that provide broadband service. They charge set fees under data plans. Still, the integrated network providers have been racing to win more users so they can lock them into monthly fees that can grow moderately over time in the same manner as a traditional utility.

[See 10 'Digital Utilities' You Need Every Day]

"There have been some slight downturns during the severe recessionary down period [in 2008 and 2009] but not a heck of a lot," says Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. "They are becoming more of a basic service."

In the past, Internet service has been a tough way to make money. In the early days, more than 4,000 companies offered dialup service, some with only a few hundred subscribers. The difference now: There are far higher barriers to entry for providing big, integrated services over high bandwidth lines stretching across the entire U.S. geography.

The majority of users subscribe to one of a small handful of providers and get a bundle of mobile phone, home Wi-Fi and television service. The companies have become expert at locking consumers into long-term service contracts by offering cut-rate plans and low-priced smartphones, and churn has declined gradually.

The towers and the traffic boom. One of the purest plays for cashing in on the digital wireless boom is American Tower. Few people know the company's name, but everyone has seen its towers scrabbled over rooftops and high points in the countryside, some disguised as tall pine trees.

More than just antennas for cell phones, the towers also carry much of the data sent over televisions and computers, as well as those increasingly data-hungry mobile devices made by Apple, Samsung and others and bundled with service contracts sold by the broadband providers.

American Towers does not have to offer anything but the communication lines used by the big telecom and cable companies. The revenue is a rare commodity because "over 95 percent of it is recurring," Zacks Investment Research said in a recent report. And the business is growing. "Increased use of smartphones and tablets will create impressive demand for tower leasing." CrownCastle is its main competitor.

American Tower got a head start in the booming business as it borrowed heavily over the years to build or acquire 55,000 towers, twice as many as the nearest competitor. Cash flow turned positive three years ago and with high profit margin on operations, it is posed to start paying investors more of its double-digit profit growth.

Income seekers can be relatively certain dividends will rise since American Tower converted most of its property into a Real Estate Investment Trust (REIT), a move that cuts its own tax payments on income it pays its investors—and unlike dividends, which are voluntary, REITs must pay 90 percent of net profit to shareholders. When profit goes up, payouts also rise. The has stock surged 60 percent since it unveiled its plan to boost payouts by creating the REIT.