With the economy slowing down, investors should think about defensive stocks. The real estate investment trust (REIT) sector has historically been a port in the storm, but not all REITs are defensive. Triple-net lease REITs are generally defensive since their tenant base is concentrated in things like drug stores and convenience stores. Mall REITs generally are not since their tenant base of consumer discretionary purchases can wax and wane with the economy.
REITs concentrating on communications infrastructure are defensive as phone service is about as necessary as toothpaste. American Tower (AMT 1.09%) is a REIT that provides services in this industry, and it has an amazing track record on its dividend.
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The cellphone tower business is highly concentrated
American Tower is a cellphone tower REIT, a highly concentrated industry. Two companies, American Tower and Crown Castle, dominate the space, followed by SBA Communications. While there are other smaller companies, the cellphone tower business is an oligopoly, and looks close to a duopoly. This means that competition is limited and there are large barriers to entry. This helps keep margins high. Cellphone towers are ubiquitous alongside highways, and this is American Tower's business.
Its biggest customers include cellphone companies such as Verizon Communications and T-Mobile US. Other tenants include cable companies and governments. American Tower's towers can accommodate multiple tenants. The leases generally last five to 10 years and contain automatic escalators. Churn rates are extremely low, on the order of 2% to 4%. About 52% of its revenue comes from North America, followed by Latin America and Asia.
American Tower purchased data center REIT Coresite last year, which branched out the company into data centers. Data centers provide networking services and storage and communications technology infrastructure including cloud storage. This will help diversify American Tower's income streams.
Demand for mobile data will be driven by 5G
Demand for mobile data has been growing by leaps and bounds, and its growth looks set to continue as 5G gets rolled out. According to at least one study, global mobile data traffic is set to grow fourfold between 2022 and 2028.
The big driver for American Tower will be 5G, which will replace 4G. 5G technology promises much faster download speeds and lower latency times. Since 2019, 5G spectrum auctions have amounted to $155 billion, which should kick off a wave of capital expenditures by the big carriers to take advantage of this new technology. On the third-quarter 2022 earnings conference call, American Tower CEO Tom Bartlett laid out the potential improvement. Latency should be five to 10 times lower, while download speeds should be 100 times faster.
The dividend is well covered
American Tower is guiding for 2022 adjusted funds from operations (AFFO) to come in around $9.65 per share. Funds from operations is the preferred earnings measure for REITs as it strips out a lot of the noncash charges like depreciation and amortization. GAAP earnings tend to understate the cash-generation capacity of real estate companies. This is a decrease from its previous guidance of $9.75 per share, which the company attributed to rising interest rates. At current levels, this puts American Tower on a 22.3 multiple of 2022 AFFO per share, which is reasonable for a company with strong growth ahead and competitive moat.
American Tower pays a quarterly dividend of $1.56 per share, which works out to an annualized dividend of $6.24 per share. If you compare that with its expected AFFO per share of $9.65, the payout ratio comes out to 65%, which is kind of low for a REIT and represents the fact that American Tower is reinvesting in the business. It also has a long track record of increasing its dividend -- in fact, it has increased its dividend every single quarter since 2012. Given the low payout ratio and its history of dividend increases, American Tower should continue to increase the dividend going forward.
