As an investor, you should constantly observe interesting business trends. Some last for years, allowing companies and industries to flourish. Current hot growth trends include artificial intelligence, the Internet of Things, 5G communications, and telemedicine. For users of smartphones and handheld devices, 5G is probably the next big wave to watch, as it signals faster download speeds, greater connectivity, and significantly reduced lag.
American Tower (AMT -0.35%) is a direct proxy to the growth of the 5G industry, as the communication tower operator owns a portfolio of approximately 18,000 communication sites. The company is structured as a real estate investment trust (REIT) and thus has to pay out at least 90% of its annual taxable income to qualify for tax incentives. Investors can enjoy a mix of growth and income from owning a piece of the company.
Here are some reasons why purchasing shares of American Tower looks like a great move.
Stable tenant leases
American Tower structures its tenant leases on an initial noncancelable term of five to 10 years with multiple renewal terms. This arrangement provides stability and visibility for the company's revenue stream. As of March 31, 2020, more than $28 billion has been contractually guaranteed. Major U.S. tenants include reputable names such as AT&T (T 0.38%), Verizon (VZ -0.10%), and T-Mobile (TMUS 0.27%).
These leases also contain provisions that periodically increase the rent based on a fixed escalation percentage (typically approximating 3% in the U.S.), an inflation index in international markets, or a mix of both. These clauses ensure that American Tower's lease revenue climbs in line with inflation over time. They also provide the business with growing and recurring cash flows for distribution.
High lease renewal rates
Tenant renewal rates remain high for the business, as it may be expensive or impractical for tenants to source alternative tower locations. Suitable alternative sites may be unavailable, ensuring "stickiness" on the part of American Tower's customer base. As of Dec. 31, 2019, the churn rate averaged approximately 1% to 2% of tenant billings every year.
Consistent growth in distributions
American Tower has also demonstrated an ability to grow its distributions steadily. Back in 2012, the total distribution per share was $0.90. The distribution has since grown at a compound annual growth rate of around 23% to $3.78 in 2019, with an enviable track record of quarter-over-quarter rises in distribution per share in the last seven years.
This amazing growth has been accompanied by growth in the company's tower count. From 2016 to 2019, American Tower grew its total tower count from 144,119 to 177,746. Of this 33,600 or so increase, almost half (15,946) came from Asia, while another 7,680 came from Africa.
5G as a long-term growth catalyst
Demand for 5G infrastructure has risen dramatically due to telecommunications advancements in recent years. This technology was only launched commercially in early 2019, but the market size is expected to grow at a compound annual growth rate of 95.8% from 2018 to 2025.
American Tower CEO Tom Bartlett has said that continued 4G and new 5G network deployments on the company's infrastructure will increase net operating income yields and returns on invested capital. The migration from 4G to 5G will take a couple of years, providing a steady growth catalyst for the business.
The COVID-19 pandemic is expected to have minimal adverse impact on the business. American Tower is positioned for strong organic growth through tower acquisitions and the long-term structural shift from 4G to 5G networks. Distributions are also expected to increase by double-digit percentages, barring unforeseen circumstances.