What is the defining characteristic of a best-of-breed business? I would argue that logging revenue and earnings growth even in the face of great adversity is indicative of a wonderful business.
When COVID-19 was labeled a global pandemic in March 2020, the disruptions to daily life led many real estate investment trusts (REITs) to post revenue and earnings declines in 2020. But the communications infrastructure REIT American Tower (AMT -0.48%) hummed along and managed to increase its revenue and earnings despite the havoc caused by the pandemic. Here are a few reasons that explain American Tower's admirable performance during the pandemic.
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1. An essential business with growth catalysts
The first reason that American Tower was able to withstand the pandemic better than most other REITs boils down to its core business model. The REIT leases communications sites (i.e., cell phone towers) to huge telecom tenants like Verizon Communications, which harness American Tower's infrastructure to provide mobile data to their customers.
The pandemic hardly slowed the growth in global demand for mobile data. Global mobile data consumption grew 42.8% from 2019 to 40.77 exabytes in 2020 (one exabyte is equal to one billion gigabytes of data). This was just a slight deceleration compared to the 50.2% growth rate from 2018 to 2019.
Rapidly growing global mobile data consumption will require significant investment on the part of companies like American Tower to meet demand. As a result of American Tower's acquisition and development activity, the company's communications sites grew from 180,000 heading into 2020 to 186,000 at the end of the year.
Along with the annual rent escalators on American Tower's leases with its tenants, this explains how the company was able to increase its revenue 6.1% year over year to $8.04 billion in 2020. American Tower's higher revenue base also propelled its consolidated adjusted funds from operations (AFFO) per share 7.5% higher to $8.49 in 2020.
And with 219,000 communications sites as of the third quarter of 2021, American Tower's growth story looks like it will keep chugging along once the pandemic eventually ends.
2. Industry-leading scale and geographic diversification
With communications sites in 25 countries around the world and a current market capitalization of $104 billion, American Tower is the largest cell tower REIT in the world. This positions the company to benefit from the growing demand for mobile data like no other.
That's because American Tower's geographic diversification allows for the best of both worlds. On one hand, the company has access to promising growth markets like Brazil, India, and South Africa. On the other hand, American Tower has a meaningful presence in more stable and developed markets like the U.S., Canada, France, and Germany.
3. Strength was evidenced by its dividend growth
When there were concerns about the security of many REITs' payouts in 2020, American Tower stood out as one of few that rapidly boosted its dividend in spite of the pandemic.
For instance, American Tower's $4.53 in dividends per share that were paid out in 2020 represented a 19.8% boost over the $3.78 paid in 2019. What makes this even more impressive is that the company continued to increase its dividend each quarter through the pandemic. How was it able to do so?
American Tower's AFFO per share growth from 2019 to 2020 played a role in the dividend growth. But the company's dividend payout ratio of just 53.4% in 2020 was an equally important part of that remarkable dividend growth. This left American Tower with the cash to acquire and develop more communications sites to further advance its revenue and consolidated AFFO per share.
The REIT could be a future Dividend Aristocrat
Overall, American Tower looks primed to deliver high-single-digit to low-double-digit annual dividend growth for the foreseeable future. Paired with the stock's 2.4% dividend yield, this is an attractive blend of yield and growth prospects. There's actually a good chance that American Tower will become a Dividend Aristocrat in the next decade. That's because of the stock's industry-leading scale in a steadily growing industry as well as its low dividend payout ratio.
