Even after falling 10% so far in 2023, shares of the cell tower owner American Tower (AMT -0.26%) have essentially performed as well as the S&P 500 index over the past 10 years. The stock would have turned a $10,000 investment in 2013 into $29,000 with dividends reinvested. That's a touch below the $32,000 that the same investment in the S&P 500 index would have produced.
What generated the real estate investment trust's (REIT) strong returns in the past? And can American Tower bounce back from its underperformance in recent months? Let's dig into the company's fundamentals and valuation to get some answers.
Robust growth catalysts that should persist
American Tower's success as an investment over the past decade has coincided with a powerful trend: the rise of the smartphone. Since the launch of Apple's (AAPL 0.52%) iPhone in 2007, the total number of smartphone users has grown from zero to an estimated 6.8 billion as of 2023.
Such huge demand for smartphones and the data they need to operate drove enormous growth in the number of American Tower's communications sites. The company's communications site count quadrupled from just shy of 55,000 at the end of 2012 to 226,000 as of March 31, 2023. This is what propelled American Tower's total revenue to soar from $2.9 billion in 2012 to $10.7 billion in 2022.
Strong growth should continue for the company. That's because, for one, it is anticipated that the total number of smartphone users will increase by nearly a billion to 7.7 billion by 2027. This will require the construction of tens of thousands of additional cell towers to support growing demand for mobile data. Second, the average monthly data consumption per smartphone user is projected to double or even triple in major markets for American Tower, such as the U.S., Brazil, Mexico, and South Africa. That's due to the emergence of newer technologies like the Internet of Things and virtual reality. This is why it is likely that the company could generate at least high-single-digit percentage annual adjusted funds from operations (AFFO) per share growth over the medium term.
Image source: Getty Images.
The dividend can keep growing
American Tower's 3.3% dividend yield is more than double the S&P 500 index's 1.6% yield. And not only does the company offer a significantly higher yield, the dividend has nearly sextupled in the past 10 years.
Data source: YCharts
Best of all, American Tower looks like it is poised to keep handing out healthy dividend growth to its shareholders. This is because the company's dividend payout ratio is set to come in at about 65% in 2023. This leaves the REIT with the capital needed to further build out its communications infrastructure to keep up with rising demand. That's probably why American Tower is confident enough to deliver dividend growth of about 10% in 2023 from 2022.
A cheap valuation
Sitting 33% below its 52-week high, shares of American Tower appear to be a no-brainer buy for dividend growth investors. This is because the company's forward price-to-AFFO-per-share ratio of 19.8 is arguably undervalued for its healthy growth potential. Further demonstrating American Tower's deep discount, its trailing-12-month dividend yield of 3.3% is well above its 10-year median yield of 1.8%. In fact, this is the highest yield the stock has sported in the past 10 years.
