When you make a call on your smartphone or surf social media, your phone transfers data through cell towers scattered all over the country; American Tower Corporation (AMT 0.80%) is the company that owns a lot of those towers.
American Tower's business is booming, but the stock has been virtually flat over the past year while the S&P 500 is up more than 10%. Here's why American Tower is a bargain today.
Real estate in the cellular business
American Tower is a real estate investment trust (REIT), a unique business structure that acquires and leases real estate. REITs must pay at least 90% of their taxable income out as dividends, making them great for dividend investors.
American Tower acquires the land for communications sites like cell towers and then builds the steel structure and leases the site out to telecommunications companies to install their antennas and other equipment. The company owns roughly 219,000 sites in both developed and emerging markets like India.
The company started in 1995 and has built its portfolio of sites over decades. Telecom companies already spend billions of dollars on their wireless networks' equipment and infrastructure, so American Tower helps take the additional cost of land ownership off their shoulders.
A dividend with room to grow
American Tower became a REIT in 2012 and has paid and raised its dividend each year since. Telecom companies have reputations for being great dividend stocks themselves because modern consumers rely so much on their phones that they pay their phone bills almost as religiously as they buy groceries or pay rent.
The dependable cash flows that wireless companies enjoy make them great tenants that reliably pay their rent to American Tower. Wireless companies need cell towers, so American Tower is paid like clockwork.
The pandemic disrupted business for many REITs in 2020. Still, if you look at the chart below, you can see that American Tower's funds from operations (FFO), the cash flow that REITs generate from their business, held up very well. FFO has grown steadily upward in an almost straight line over the past decade.
The company's dividend yield is currently 2.4%, which isn't the most significant yield out there. Still, a healthy 54% dividend payout ratio supports the dividend so that investors can feel good about its reliability.
Additionally, management has aggressively raised the dividend; it's grown more than 19% per year on average over the past five years. If you're an investor who buys and holds for a long time frame, that dividend growth quickly adds up.
Tailwinds for growth
REITs aren't typically high-growth companies, but there's enough opportunity for American Tower that investors could see solid growth over the coming years. Mobile 5G networks are being built across the United States and worldwide.
Mobile data consumption in North America grew 57% annually from 2007 to 2021. This growth will likely continue as 5G unlocks more functionality for mobile networks, including streaming, connected vehicles, and more. Management expects demand for its real estate to remain strong as cellular carriers grow the network capacity to support these applications. American Tower recently acquired data center REIT CoreSite Realty in a $10 billion cash deal, helping position American Tower to accommodate the demand for connective technology further.
A similar cycle will likely play out in emerging markets with rapidly growing data needs as they modernize. For example, India has 1.38 billion people, yet nearly a fifth of the population still doesn't have access to 4G networks. As these populations catch up on technology, it could drive demand for tower sites.
Shares are absurdly cheap
The stock has barely moved in a year, which could have something to do with the company's recent acquisition. Sometimes, a large acquisition can hurt a stock until it proves it can effectively bring the addition into its business.
American Tower's generated $10.86 per share in FFO over the trailing 12 months, putting the stock at a price-to-FFO ratio of 21. The business has virtually quadrupled its FFO-per-share over the past decade. Hence, the stock appears very attractively priced when you consider its demonstrated growth and 5G's potential to create increased demand for communications sites over the rest of the decade.
Nobody can know what a stock will do tomorrow, next week, or even next year. But American Tower is a growing business with industry tailwinds behind it. It could take some time, but the stock has the ingredients for solid returns over the coming years.