I have built my portfolio from the bottom up, by first trying to find attractive companies and then worrying about how they fit into the bigger picture. But now that I've got a couple dozen investments, new stocks have to compete with old holdings for cash. I like American Tower (AMT -0.70%) and have considered buying it multiple times, but each time I look at it, I end up at the same conclusion: I like what I already own more. Here's why I think American Tower is a great business but still haven't bought the stock.
American Tower is the backbone of the future
I had a rotary phone growing up. Some people won't even know what that is. It was a huge upgrade when my family bought its first cordless phone (not cellular, just cordless). For me, the idea that we can carry a phone in our pockets and make calls with wristwatches is the stuff of Dick Tracy comics. But it is very clear that the future will increasingly be mobile.
Image source: Getty Images.
To put some numbers on that, American Tower expects mobile connected devices to increase at a compound annual rate of 7% over the next five years. That should be driven by slow growth in cellular phones and a rapid proliferation of Internet of Things devices. This growth, plus the rising consumption of media on cellular devices, is going to significantly increase the amount of data that traverses wireless networks. Data per device is projected to expand 12.5% a year over the next five years.
And that's just the developed and largely saturated U.S. market. Emerging markets have the potential to grow even more rapidly, which is why American Tower is expanding its business around the globe. Each cell tower, meanwhile, can be very profitable for the real estate investment trust (REIT). A tower with three tenants, which is not uncommon, can have a gross margin of 83% and a return on investment of 24%. So the future looks like it could be fairly bright.
Meanwhile, interest rates are rising, putting pressure on yield investments like REITs. Investors are a bit miffed that American Tower made a big investment in data centers that hasn't panned out as expected. And capital spending in the telecom space is cooling after a big push to move to 5G. Investors are bearish on American Tower today, pushing the stock down around 40% from its 2021 highs. The yield is near its highest levels in history at 3.5%.
And yet I still don't own American Tower
I really do like the story behind American Tower, but it is most appropriate for investors focused on dividend growth. That's backed up by a historical dividend growth rate of around 20% over the past decade. Even the 10% boost over the past year is still pretty high.
The problem for me is that I don't own REITs for rapid dividend growth. I own REITs with the expectation that they will provide me with attractive yields and slow appreciation. I see them as a foundational income investment. The other REITs I own, like Realty Income (NYSE: O) and Federal Realty (NYSE: FRT), track better with my expectations for a REIT investment. And they have much longer dividend histories compared to American Tower, which is still a fairly young REIT.
There's one more reason. I'm willing to make exceptions for companies that I think are attractive. American Tower is attractive, in my eyes. But I already own several other REITs. With a half dozen or so in my portfolio, I'm reluctant to add more REITs.
The risk of having too much exposure to one sector is on clear display today, given the impact rising rates have had on virtually all REITs (the average REIT is down around 30% since the start of 2022). I'm a fan of diversification, so adding more REITs to my portfolio would be counterproductive. My preference is to simply add more to what I already own. Otherwise, I would want to replace a current holding with American Tower. Except, as noted, I'm quite fond of what I already own.
You don't have to swing at every pitch
Warren Buffett has an interesting saying. To paraphrase, Wall Street throws pitches to you all day long, but there's nobody calling balls and strikes. You can swing whenever you want, or just sit and let the pitches go by. I like American Tower stock, but it just doesn't fit into my portfolio right now.
