Almost everyone in the U.S. uses a cellphone, so you might think companies like AT&T and Verizon, which run the leading wireless networks, would've been great investments over the past decade.
However, each stock has returned a total of just 13% (AT&T) and 33% (Verizon), including the generous dividends each is known for. Meanwhile, American Tower (AMT 0.17%) has trounced both, up 206% during that time.
How did this happen? Here is what you need to know, and whether American Tower is still worth buying today.
A better telecom investment than the carriers
Don't believe me? Check out the below chart. The question is how American Tower has outperformed the companies that run the No. 1 and No. 2 wireless networks in the U.S.
AMT Total Return Price data by YCharts
American Tower is one of the most powerful companies in the telecom industry, yet most consumers have never heard of it. It's a real estate investment trust (REIT), a company specializing in real estate. It owns and operates roughly 225,000 sites worldwide that telecom and other communications companies use for their cell towers and other infrastructure.
In other words, American Tower is the telephone company's landlord. The world is becoming increasingly digital as 4G, 5G, and cloud computing continue growing, driving demand for cell towers and data center real estate. American Tower is guiding for 5% tenant billings growth in 2023.
Reliable dividend growth
American Tower wasn't always a REIT, transitioning to the business model in 2012. It's been a terrific dividend growth stock since then, as REITs are required to pay out most of their taxable profits to shareholders. Management has paid and raised the dividend for 13 consecutive years.
It's not a huge yield at 3%, but it's averaged double-digit growth for over a decade, though its most recent increase was 6%. The dividend payout ratio is very healthy at 65% of funds from operations (FFO), the cash profits a REIT makes.
AMT Dividend data by YCharts
Real estate is mission-critical for communications companies -- they can't run their businesses if they get kicked off the land that has their cell towers. That makes American Tower's business quite resilient. Given the healthy payout ratio, investors shouldn't worry about a surprise dividend cut.
Is the stock a buy today?
Rising interest rates have thrown American Tower a curveball over the past year. A REIT can't retain much earnings, so it must raise money for expansion through debt (or by issuing shares). The company acquired CoreSite in a $10 billion acquisition in late 2021 to get into data centers, but that was just before the Fed began rapidly hiking interest rates, making borrowing more expensive. It's unfortunate timing, and now management is anticipating a $315 million hit to 2023 profits due to higher borrowing costs.
To combat this, management is reigning in the balance sheet, lowering leverage, and shifting more debt to fixed interest rates. This could slow the company's growth in the short term, but will maintain the quality of American Tower's financials.
Image source: American Tower.
At a price-to-FFO ratio (like price-to-earnings for a REIT) of 21, the stock isn't a bargain, given its expected 2% contraction in 2023 FFO per share. Investors shouldn't rush to buy shares in this higher-rate environment -- American Tower could continue falling. Slow and steady purchases are recommended for those buying the stock, as timing the market doesn't work.
Long-term investors could accumulate shares during this period of weakness and reap the benefits over the years ahead, when the economic environment turns more favorable.
