Given its nearly 40% price decline since mid-2021, one might think that American Tower (AMT -0.70%) is dealing with a painful business downturn. While it wouldn't be fair to say the real estate investment trust (REIT) is hitting on all cylinders, it isn't exactly struggling. If you are looking for a long-term dividend grower, American Tower could be an interesting choice today, given its historically high 3.4% yield.
Too much enthusiasm
Cell phones and mobile computing are both big deals, and on a global scale. But Wall Street has a tendency to get too enamored of investment stories, and that's probably the reason for the particularly steep price decline at American Tower. An ill-timed expansion into data centers has hurt sentiment, as well. Adjusted funds from operations (FFO) were down 0.4% year over year in the first quarter. And the full-year target is for a roughly 1% drop, year over year, in 2023. But neither of those numbers seem to be enough to justify a 40% share-price decline. This looks more like a story stock in which investors have lost interest.
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That, however, could be an opportunity for investors who think in decades and not years. The big price decline has pushed the dividend yield up toward the highest levels in the REIT's history. While 3.4% may not seem that high, keep in mind that the dividend has grown at a compound annual rate of 20% over the past decade. While increases over shorter time periods are below that figure, they are still above 10%. The first-quarter dividend in 2023, for example, is roughly 11% higher than it was a year ago.
The most recent dividend increase, by the way, was made at a point when management knew that 2023 would be a more difficult year on the adjusted FFO front. It seems it would be hard to complain about a 10%-plus increase in a tough year, but the long-term is really the story here.
Getting bigger
There's no reason to believe that mobile computing and cellphone usage will start to decline. In fact, the far more likely scenario is that demand for American Tower's properties will increase over time. Meanwhile, it has a global portfolio, giving it exposure to both developed markets that are upgrading to newer technology, such as the United States with 5G, and emerging economies where cellphone usage still has room to grow. Africa is an example.
Meanwhile, there is a huge amount of leverage built into the REIT's business model. Basically, it costs about as much to build and maintain a cell tower for one customer as it does for three. However, as you add tenants, the profitability of a tower increases dramatically. A tower with a single tenant will have around a 40% gross margin while one with three tenants will have a gross margin of more than 80%. The return on the investment in a tower goes from 3% with one tenant to 24% with three.
There are two growth drivers, however, even in mature markets like the United States. First off, Internet-of-Things connections are expected to expand 16% annually over the next five years even as regular cell demand is going to muddle along growing at 2% a year. However, data demand from regular cellphone users is expected to increase 17% a year, so it isn't exactly a moribund business. For reference, the same figure for Internet-of-Things devices is 22%, but that's off a notably smaller base.
More traffic should, over time, result in more need for capacity. That means more equipment installed at cell towers will be required to provide the additional capacity. In all, there's still a good back story here for investors who want to own a REIT with a rapidly growing dividend.
Reading the tea leaves
Mr. Market can be a very fickle fellow, and it's hard to tell which way his mood swings will run on any given day, week, month, or year. However, the long-term trends backing American Tower's business seem likely to remain positive for years to come. And given that, maybe the dramatic way this stock fell out of favor on Wall Street was a bit overdone. If you can stomach being a bit of a contrarian in your search for dividend growth stocks, this is one stock that you'll want to dig into more deeply.
