Shares of American Tower (AMT 0.23%) have gotten shellacked over the past year. The data infrastructure-focused real estate investment trust (REIT) is down about 30% from its peak last year.
While American Tower is experiencing some headwinds, the downdraft in its stock price makes it look like a great buy these days. Shares currently yield more than 3%, which is their highest level in the past decade:
AMT Dividend Yield data by YCharts
With that dividend expected to continue rising in 2023 and beyond, it's an attractive option for income-seeking investors.
Headwinds hitting growth
American Tower is coming off a solid year. The infrastructure REIT recently reported its fourth-quarter and full-year results. For the year, total revenue grew by 10.6%, while its adjusted funds from operations (FFO) increased by 5.6% (and 3.5% on a per-share basis).
The company benefited from acquisitions completed in 2021 and organic growth across its towers and data centers. That helped offset headwinds from higher interest rates, foreign exchange fluctuations, and tenant-related issues.
Unfortunately, those headwinds will have a greater impact on the REIT's results in 2023. While the company expects property revenue to grow by 2.9% at the midpoint of its guidance range, it sees adjusted FFO declining by 1.6% per share.
Without those headwinds, cash flow would have continued to rise. CFO Rod Smith noted on the fourth-quarter conference call that without all the near-term (and primarily one-time) growth headwinds it's facing this year, "our business is demonstrating solid growth contributions of around 9%."
More dividend growth ahead
Despite those near-term headwinds, American Tower expects to continue delivering healthy dividend growth. The CFO stated on the fourth-quarter call: "In 2023, we will continue to deliver returns to our shareholders through the growth of our dividend. And subject to Board approval, we expect to distribute approximately $3 billion, representing an approximately 10% year-on-year growth rate on a per-share basis."
That's a sizable increase and follows last year's 12.5% dividend growth rate. That would continue the strong upward trajectory of the dividend over the past decade:
AMT Dividend data by YCharts
American Tower has expanded its payout at a more than 20% compound annual rate since becoming a REIT in 2012, an elite pace for the sector.
Even with the dividend growing faster than AFFO these days, American Tower can easily afford the higher payout. At $3 billion, American Tower's dividend payout ratio will be around 67% of its adjusted FFO in 2023 at the midpoint of its guidance range. That's a healthy level for a REIT. This rate implies the company will generate about $1.5 billion of free cash flow.
American Tower will retain enough cash to cover the bulk of its $1.7 billion capital spending plan. The company expects to invest most of that money internationally to construct about 4,000 new tower sites. The REIT is also investing capital to modestly increase its data center capacity after selling a record amount of capacity last year.
In addition, American Tower expects to continue focusing on strengthening its balance sheet following two sizable acquisitions in 2021. The REIT aims to get leverage back within its 3 to 5 times target range. It ended 2022 with a 5.4 times leverage ratio.
A reacceleration awaits
While 2023 will be a down year for the REIT, that's an outlier due to several near-term headwinds. The longer-term outlook is much brighter. The CFO provided some color on what the company sees ahead on the call, stating: "As we look ahead, we expect to further build on the successes of the recent years and leverage our portfolio to drive strong recurring growth on the back of consistent secular technology trends for many years to come."
Data usage continues to surge. For example, total connected devices in the U.S. should grow at a 10% compound annual rate, while U.S. mobile data usage projects to expand at a mid-20% compound annual rate through 2027. These trends are driving the need for additional infrastructure to support increased data movements and speed. That could enable American Tower to deliver adjusted FFO growth in the high-single to low-double digits in the coming years.
Meanwhile, as leverage improves, American Tower will be in a better position to make acquisitions and other investments to further accelerate its growth rate.
Buy the dip
Near-term headwinds are hindering American Tower's growth, which is weighing on its shares. That has the REIT offering its highest dividend yield in the last decade. With more dividend growth ahead in 2023 and its overall growth rate poised to reaccelerate in the future, the current sell-off looks like a great buying opportunity for long-term investors.
