American Tower (AMT -0.70%) has put up fantastic returns for investors over the past two decades. Since 2002, its total return level has been close to 10,000%, ranking the stock right on the threshold of becoming a 100-bagger. By comparison, the S&P 500 has put up a total return of 637% over that same period.
But the last year has been a different story. The cell tower real estate investment trust (REIT) is facing multiple headwinds to its earnings, which have caused the shares to nosedive. They are down 33% in the past 12 months while the S&P 500 is up some 6%, a nearly 40% gap in price performance.
This dip has brought American Tower's dividend yield to a record level, close to 3.5% as of this writing. While there are definitely some near-term concerns for the company, that dividend yield could present a great buying opportunity for investors focused on the long term.
Real estate for cell towers
American Tower provides real estate for wireless communication networks. Generally, the company will lease space on its towers to telecommunication companies such as Verizon Communications to put up stuff like antennas and 5G equipment. Tenants will sign long-term leases with American Tower, generally for five to 10 years, and with rent price escalators of 3% annually. Buying land and building cell towers comes with high upfront costs. But with consistent pricing power and a durable customer base, American Tower can get fantastic returns on these investments over the long term.
As a REIT, American Tower is required to pay out at least 90% of its taxable profits each year as dividends to its shareholders. Riding the tailwind of increasing cellular data adoption, American Tower's profits have soared in recent years. This has resulted in its dividend per share growing by a total of 486% over the last 10 years.
AMT Dividend Per Share (TTM) data by YCharts.
Multiple headwinds to earnings
Among the key themes that have dominated the economic world in the last few quarters have been rising interest rates and an appreciating U.S. dollar. Both have presented headwinds to American Tower's earnings.
The REIT funds its capital expenditures by borrowing. Last quarter, it had $39 billion in total debt on its balance sheet. After the Federal Reserve raised benchmark interest rates at the fastest pace in its history last year, the interest expense on this debt ballooned. In the second quarter of this year, American Tower's interest expense was $348 million compared to $213 million in the same period in 2021.
The company has a major international presence, which means it collects a lot of revenue in foreign currencies. When the U.S. dollar appreciates in value relative to foreign currencies -- which happened in a big way in 2022 -- American Tower faces a revenue growth headwind unless it significantly raises the prices it charges to its international customers.
Factor in inflation that has increased its input costs, and it is no surprise to see American Tower's earnings per share dropped to $2.07 in the past 12 months. This was well below its current annual dividend per share of $6.16. While foreign exchange rates can be unpredictable, inflation has come down markedly in the United States over the past 12 months (the Consumer Price Index rose just 3.2% year over year in July), which should allow the Federal Reserve to wrap up its interest rate hikes.
So the headwinds should start to abate if that scenario plays out as expected, and possibly turn into tailwinds for American Tower over the next few years.
AMT Dividend Per Share (TTM) data by YCharts.
Can management keep growing the dividend?
While there may be some more near-term pain for American Tower, 2022 was one of its worst years ever from a macroeconomic standpoint and those conditions likely won't be repeated. This sets the company up to resume its long-term earnings growth trajectory at some point in the next few years.
There should be two engines to drive American Tower's earnings and dividend payouts higher: growing use of wireless data and international coverage. Mobile data consumption is projected to grow at a 20% annualized rate from 2023 through 2028 in the United States, which should provide a steady demand tailwind for American Tower's real estate. Internationally, the company has major footprints in Latin America, Africa, and India that have huge growth potential since mobile data and smartphone penetration lag behind the United States in most markets in those regions.
Two important details to remember are the REIT's long-term leases and annual price escalators. When American Tower signs a tenant up for space on a new tower or towers, that doesn't just mean revenue for a single year, but a growing stream of revenue for the next decade. Given the stock's record-high yield, now looks like a great opportunity to take the plunge with this steady dividend grower.
