REITs are considered inflation hedges, providing consistent dividend returns in uncertain economic periods. However, higher interest rates and recessionary pressures have led most big tech companies to cut their office spaces. As a result, REITs face an uncertain outlook. In such a scenario, REITs do look undervalued but may look like risky bets. Nonetheless, tower REITs like American Tower (NYSE:AMT) have a slightly different business model. With secure business fundamentals, an impressive long-term growth trajectory, and stable dividends, this REIT presents a good buying opportunity.
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Tower REITs Have Attractive Long-Term Growth Potential
As a general rule, in a volatile macroeconomic scenario with insanely high inflation and interest rates, Real Estate Investment Trusts or REITs are the preferred choice for income-oriented investors. REITs act as a hedge against inflation as they generate steady cash flows through rental income and promise attractive dividend yields.
Likewise, REITs are expected to perform well in an inflationary environment. At present, however, REITs with commercial properties are exposed to the risk of reduction in office spaces by big tech companies due to cost-cutting measures and recessionary pressures.
Tower REITs, however, are a different ballgame altogether. In particular, they can act as safer bets as they are backed by robust demand. In contrast to shrinking office spaces, wireless communication companies continue to expand, with more subscribers added with each passing year. Over the past 15 years, mobile data usage has seen a record compound annual growth rate (CAGR) of 57% from 2007-2021.
What’s more, the world is currently evolving from the 4G era to the early stages of 5G. The latest 5G network creates a massive opportunity for tower REITs.
5G towers enable faster speed but don’t have a wider coverage. This creates the need for building more and more towers, acting as a tailwind for tower REITs like AMT. 5G network expansion is here to stay, implying bright long-term potential for AMT.
American Tower: Solid Fundamentals
Based in the U.S., American Tower Corporation is one of the largest REITs globally. It is a leading independent owner and operator of wireless and broadcast communications infrastructure in several countries worldwide.
American Tower has a global portfolio of approximately 223,000 communications sites. It remains one of the top picks in the REIT space, backed by solid fundamentals.
AMT’s consolidated Adjusted Funds From Operations (AFFO), a measure of cash flow for REITs, have posted 14.2% CAGR over the past 10 years.
In addition, the REIT has achieved an impressive 14.1% CAGR in its adjusted EBITDA from 2011 to 2021. Further, it has delivered consistent ROIC despite investments made towards growth in site count.
On October 27, AMT reported EPS of $1.80 per share. It handily beat analysts’ estimates of $1.12 per share, driven by strong leasing trends. During its earnings release last month, the REIT revised its capital allocation outlook and reiterated 12.5% annual dividend-per-share growth. This is reassuring for investors, given the tough macro climate.
CEO Tom Bartlett stated, “Our customers continued to aggressively deploy next-generation networks. Our business continues to demonstrate resiliency in the face of economic volatility, delivering solid performance and double-digit growth in our common stock dividend.”
Consistently Growing, Steady Dividends
The company has an impressive track record of growing its dividends. It has achieved average annual dividend growth of more than 20% since 2012.
On September 22, American Tower Corporation increased its quarterly dividend cash distribution by 3% to $1.47 per share, compared to the $1.43 per share paid earlier.
Based on the current share price and quarterly dividend payments, AMTs dividend yield is about 2.6%, higher than the sector average of 2.04%.
Besides American Tower, see which other stocks have an ex-dividend date in November 2022. Investors can also take advantage of TipRanks’ dividend yield calculator.
Is American Tower a Good Stock, According to Analysts?
The Wall Street community is clearly optimistic about American Tower stock. Overall, the stock commands a Strong Buy consensus rating based on nine Buys and three Holds. American Tower’s average price target of $239.73 implies 9.9% upside potential from current levels.
Takeaway: Consider Buying American Tower Stock
American Tower is one of the largest and geographically diversified tower REITs. Year-to-date, AMT stock has lost almost a quarter of its market capitalization. In terms of valuation, AMT stock has historically traded at a premium versus the REIT industry average. However, it deserves the premium given its solid business fundamentals, geographical footprint, and future prospects.
Meanwhile, unlike conventional REITs, tower REITs are less fragile to increasing interest rates. They present significant upside potential backed by the raging 5G industry growth across the world.
American Tower is one of the biggest infrastructure providers for the wireless carrier industry. It is bound to benefit from the humungous growth potential. Backed by strong business fundamentals and steadily-growing dividends, I am optimistic about AMT’s growth story.
