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Want Income and Growth? Consider American Tower

By Brent Nyitray, CFA - Mar 14, 2021 at 7:05AM

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Growth and income don't have to be mutually exclusive.

As a general rule, investors are forced to choose between income and growth. Growth stocks use all their available capital to grow the business and don't like to spend it paying shareholders; this is especially true when the company has yet to earn enough net income to pay a dividend. Emerging tech companies fit into this category. On the other hand, high dividend payers are typically mature companies in industries that are growing more or less in line with the overall economy. The classic example of this would be a public utility.

Finding both can be difficult but not impossible. One such company is American Tower (AMT 3.65%), which both exhibits double-digit growth and pays a decent dividend.

Picture of a cell phone tower

Image source: Getty Images.

Cell phone towers with long-term leases mean predictable income

American Tower is a real estate investment trust (REIT) that owns and operates "multi-tenant communications real estate." In plain English, that means the company owns and operates cell phone towers. It's one of the two biggest in the U.S., along with Crown Castle International.

American Tower leases its cell towers to wireless carriers like AT&T and T-Mobile. These leases are long term, typically 5 to 10 years, and have automatic escalators of around 3% or so. They're extremely stable -- churn rates, meaning customers that let leases expire, are generally around 2%. Churn is so low because alternative sites are often difficult to find, and switching involves high costs and potential performance degradation (although it's worth noting that churn is expected to increase over the next two years as T-Mobile decommissions the old Sprint network as a result of their merger). As a result, baseline growth is pretty much baked in.

Meanwhile, growth is being driven by the rollout of 5G networks as well as increases in tower density for 4G. This industry is expected to grow for the foreseeable future as demand for mobile data increases, a classic secular growth story.

The company generated 56% of its revenue last year in the U.S. and Canada, with the remainder spread out over the rest of the globe. American Tower has been a consistent performer, delivering an 11% compound annual growth rate (CAGR) in adjusted funds from operations (AFFO) per share over the last five years. Since American Tower is a REIT with vast real estate holdings, AFFO is a better indication of cash flow than net income. In addition to its AFFO growth, American Tower has grown its annual dividend from $1.81 per share to $4.53 per share over the same period.`

American Tower is guiding for 2021 AFFO per share to come in around $9.20, which is about 8.5% growth. From 2023 through 2027, the company is guiding for organic tenant billings to accelerate to at least 5%. In addition, American Tower expects to construct 6,500 new sites in 2021, which is a company record.

The company has suffered from the rotation out of COVID-19 stocks

American Tower benefited from the initial COVID-19 trading, in which data and "work from home" companies were scooped up. The company hit a peak over the summer and has subsequently pulled back by about 21% as investors have rotated into more economically sensitive stocks, which will benefit the most from the recovery and stimulus spending. Based on company guidance of $9.20 per share, American Tower is trading at about 23 times expected AFFO per share, which is a reasonable multiple for a double-digit grower in this interest-rate environment.

American Tower raised its dividend every quarter this year, taking it from $1.01 in the fourth quarter of 2019 to $1.21 in the fourth quarter of 2020. It hiked the dividend again recently to $1.24. If you annualize out that dividend, it works out to be a 2.3% yield. American Tower also guided for around a 15% increase in the dividend this year. Investors are getting high-single-digit growth in income and double-digit dividend growth. Who says you can't get income and growth together?

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Stocks Mentioned

American Tower Corporation Stock Quote
American Tower Corporation
$258.52 (3.65%) $9.10
Crown Castle International Corp. Stock Quote
Crown Castle International Corp.
$191.61 (3.46%) $6.40

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