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Thursday, 01/06/2022 8:29:37 PM

Thursday, January 06, 2022 8:29:37 PM

Post# of 188
>>> Why American Tower Can Continue Its Rapid Growth


GuruFocus

by Nathan Parsh

December 27, 2021


https://finance.yahoo.com/news/why-american-tower-continue-rapid-194211064.html


Many investors own real estate investment trusts, or REITs, for their generous dividend yields. There are some REITs that offer a lower yield, and though they might not meet the objectives of an income-focused investor, this doesn't mean that low yielding REITs should be avoided. While some might have low yields due to business problems, there are others that have low yields due to faster growth and higher valuation multiples, and these can sometimes prove to be extremely profitable in the long run.

Take American Tower Corporation (NYSE:AMT), for example. This company's dividend has compounded at a rate of more than 20% since becoming a REIT. Despite this level of dividend growth, American Tower yields just 2% today as the strength in the business has caused the stock to rise more than 166% over the last five years. For context, the S&P 500 Index has returned a cumulative 111% over this period of time. Lets take a closer look into American Tower to see why I believe it will remain a high growth REIT.

Business overview and recent earnings highlights

American Tower began as a subsidiary of a radio systems company in the mid-1990s. It was spun off from its parent company in 1998 and converted to a REIT in 2012. American Tower is valued at $127 billion today and generated annual revenue of slightly more than $8 billion last year.

The REIT has an incredible size and scale as the largest independent operator of wireless telecom and broadcast towers in the world. It is also one of the largest REITs in the world regardless of type of real estate.

American Tower has approximately 43,000 towers in the U.S., giving it a leadership position in what has become an incredibly important industry over the years. This same infrastructure will be vitally important as the rollout of 5G service continues.

American Towers most recent quarter, for which it announced earnings results on Oct. 28, shows that the company continues to capitalize on tailwinds in its business. Revenue for the quarter grew almost 22% to $2.45 billion, topping Wall Street analysts estimates by $40 million. Adjusted funds from operation of $2.49 per share was a 26 cent, or 10.3%, improvement from the prior year and was 17 cents ahead of expectations.

Property revenue surged 19.2%. Organic tenant billings growth, which reflects just properties that the trust has owned since the beginning of the prior year period, was up 4.9%. International was the real driver during the quarter as organic tenant billings growth was 5.9% for the period. The best performing region was Africa, up more than 9%, but Latin American wasn't far behind at 7%.

Prospects for growth

American Tower has expanded from just a U.S.-based business into international markets. As of the end of last year, American Tower had nearly 76,000 towers in the Asia/Pacific region, 41,500 in Latin America, 20,000 in Africa and 5,330 in Europe. American Tower has just begun entry into certain markets such as Australia, Canada, France, Niger and Spain, all of which occurred within the past five years.

Outside of the U.S., most of American Tower's markets haven't completed 4G networks yet. Regardless, data consumption is surging, with some international markets seeing 100% growth year-over-year. The demand for additional towers will mean higher capital spending budgets on the part of carriers in order to improve infrastructure, putting the REIT in a sweet spot to benefit from higher global demand for its properties.

As a result, American Tower expects nearly all of its regions to see organic growth in the coming years. In total, the REIT expects organic billings growth of 4.5%. The U.S. and Canada are projected to return as much as 4%, primarily due to 5G rollout. International markets should grow at a rate of 5% to 6%. These markets are led by Africa, with expected growth of at least 8%; Latin America, which is projected to be higher by more than 7%; and Europe, up at least 5%. Asia is expected to be flat, as other companies are dominant in this region.

International regions haven't experienced as much development as its domestic market, which should provide American Tower a long runway for growth as these markets should see increased demand for wireless telecom and broadcast service going forward.

The REIT has long-term contracts with most carriers that provide automatic rent escalators. In the U.S., the typical yearly increase is close to 3% with many international markets tied to inflation, giving some visibility to future revenue totals.

American Tower hasnt been shy about acquiring additional businesses to augment its core portfolio. For example, the REIT announced on Nov. 15 that it was acquiring CoreSite, which owns 25 data centers and more than 32,000 interconnections in the U.S., for $10 billion in cash. This will grant American Tower entrance into new markets that it doesn't already touch. The transaction will add $655 million in annual revenues to American Towers business, which would have represented more than 8% of last years total.

The REIT has been very successful as adjusted funds from operation (AFFO) have a compound annual growth rate (CAGR) of 15% over the last 10 years. This growth rate would have been higher if the share count had not increased by 13% over the same time frame.

Dividend analysis

Business results have enabled American Tower to grow its dividend at a level rarely seen amongst REITs. Unlike most in the real estate sector, the trust increases its dividend almost every quarter instead of once per year. Shareholders received 20% more in dividends per share this year than they did in 2020. The trust raised its dividend 6.1% for the Jan. 14, 2022 payment date. American Tower has a nine-year dividend growth streak while the dividend has a CAGR of 22.3% since 2012.

With an annualized dividend of $5.56, American Tower has a forward dividend yield of 2%. As REITs go, this is a low dividend yield, but this tops the stocks historical average yield of 1.8%. It is also superior to the 1.25% average yield for the S&P 500 Index.

The REIT distributed $4.33 of dividends per share in 2021. Wall Street analysts expect American Tower to earn $10.25 per share in adjusted funds from operation this year, resulting in a projected payout ratio of 42%. Adjusted funds from operation are predicted to rise to $10.30 for the next fiscal year. Using the new annualized dividend, the payout ratio is 54%. American Tower has averaged a payout ratio of 44% over the past five years. Both the average and projected payout ratios are very low for a REIT, putting American Tower in a good position to continue to raise its dividend moving forward.

Valuation analysis

Shares of American Tower trade close to $279. Using analysts estimates for 2021 and 2022, the stock has a forward price-to-funds-from-operation ratio of just over 27 for both years. This is a premium to the stocks five-year average price-to-funds-from-operation ratio of 23.4.

Shares are also trading ahead of their GuruFocus Value, but not overly so.

Why American Tower Can Continue Its Rapid Growth

American Tower has a GF Value of $269.72, equating to a price-to-GF-Value ratio of 1.03. The stock is rated as fairly valued by GuruFocus.

Final thoughts

American Tower might not offer the type of yield that REIT investors are accustomed to seeing from this sector of the economy, but this isn't due to a lack of raising dividends on the company's part. The dividend has compounded at an extremely high rate since the REIT was formed. Shareholders of the REIT have benefited from incredible share price returns over the medium-term, easily outperforming the broad market.

American Tower is set to benefit from several catalysts for growth, especially 5G rollout in the U.S. and growing demand in developing markets, which should position the REIT to continue its streak of strong earnings results.. In turn, dividend growth will likely remain elevated.

The stock isn't cheap, either on a historical basis or compared to the GF Value, but quality names with excellent fundamentals and high expectations for future growth rarely are.

The long-term track record for adjusted funds from operation and dividend growth suggests that American Tower could be a solid investment for those looking for more than just yields from a REIT investment.

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