One proven way to build both your wealth and income over time is to invest in stocks that are on their way to becoming Dividend Aristocrats -- companies in the S&P 500 that raise their dividend payouts at least 25 years in a row. But how can you find them? Businesses like this often have several characteristics in common, but an important one is a strong position in a growing industry.
American Tower (AMT 0.17%), a real estate investment trust (REIT) that specializes in cell towers, is one company that I believe has the potential to earn standing as a Dividend Aristocrat next decade. Let's dig into the reasons why -- and whether this is a good time to buy.
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Secular tailwinds are powering American Tower's spectacular growth
With more than 219,000 communications sites in 25 countries, American Tower is the largest communications infrastructure REIT in the world. The stock's $127 billion market capitalization at recent prices is considerably more than its next biggest competitor, which is Crown Castle International at $86 billion.
While the worldwide market for American Tower's services is large already, it's still growing. Developing nations are becoming richer and demanding more wireless services, which should result in steady growth for the telecommunications industry. This thesis is precisely why market research company BCC Research anticipates that the global market for telecom towers will grow from $39.5 billion in 2018 to $114.1 billion by 2026, or a rate of 14.5% annually.
4G will have its place for the foreseeable future to support the current demand for mobile data, which mostly stems from technologies including social media, video streaming, and e-commerce. But the continued adoption of more efficient 5G cell towers will be necessary to support the innovations that are on their way, such as virtual reality. Economic development around the world and new innovations explain why analysts are expecting the average global monthly usage of mobile data to nearly quadruple from 9.4 gigabytes last year to 34 gigabytes by 2026.
As the largest player in the industry, American Tower will be able to build 5G cell towers to meet this growing demand for mobile data and lease those out to large telecoms such as Verizon Communications, which then use American Tower's infrastructure to provide wireless services to customers. And since these leases are typically locked in for the first five to 10 years, with several five-year renewal periods after that, American Tower boasts a great deal of revenue and earnings stability.
Even better, U.S. leases typically include 3% annual increases in rent, while international leases are often based on local inflation indices. This builds in growth for American Tower right off the bat before even considering new cell tower constructions and acquisitions.
Powered by its leadership in its promising industry, American Tower just turned in another excellent quarter for shareholders. The company's total revenue in this year's third quarter surged 21.9% from the same period the year before to $2.45 billion. American Tower's adjusted funds from operations (AFFO, the REIT equivalent of earnings) per share advanced 11.7% year over year to $2.49.
The company's results in the third quarter prompted it to raise its revenue guidance range for this year to $9.07 billion at the midpoint, which would work out to impressive 14% growth over last year. American Tower also raised its midpoint AFFO outlook to $4.27 billion, which would equate to 13.3% growth compared to 2020.
The payout should continue to grow at a robust clip
American Tower's fundamentals are healthy, which has allowed the company to grow its dividend for 11 consecutive years and sport a solid 2% yield at recent prices. But can it sustain those increases for another 14 years and become a Dividend Aristocrat?
American Tower has paid out $1.67 billion to its shareholders so far this year, out of $3.32 billion in total AFFO, which works out to a 50.5% payout ratio through the first nine months of this year. That's easily managed for a powerful business in a growing industry, and it should allow plenty of room for the stock's dividend to keep growing at a double-digit annualized rate, just as it has for the past decade.
Could it be a fit for your portfolio?
American Tower's stock is trading for roughly 30 times AFFO at recent prices. If you believe that wireless services will remain in high demand, American Tower's communications infrastructure should as well -- the company has grown AFFO at a roughly 12% annualized rate over the past five years, and that seems achievable over the next five, too. Add a good yield with above-average increases and a sustainable payout ratio, and American Tower's price today looks very reasonable for growth-oriented investors.
