American Tower's (AMT -0.70%) stock price hasn't been as low as it is today since 2019, roughly five years ago. However, the huge 40% drop from 2021 highs has pushed the dividend yield up to around 3.5%. That is basically the highest the yield has ever been in the real estate investment trust's (REIT's) history. If you are looking for a bargain stock, American Tower should be on your short list.
American Tower is the cell backbone
Although American Tower owns some data centers, its core business is owning the cellular towers that allow the world to communicate without being tied to a landline. It owns 226,000 cell sites across North America, South America, Europe, Africa, and Asia. Cell towers can be highly profitable.
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With a single tenant on a tower, American tower's average gross margin is a respectable 40%. If it adds a second tenant that jumps to 74%. A third tenant, which is not at all uncommon, brings gross margin up to 83%. The company's return on investment in a tower with three tenants can be as high as 24%.
Adding to the allure here is that demand for cellular connections is expected to continue growing. People are using more and more mobile devices over time. The demand for data is, as you would expect, expanding as a result of that and the increasing mobile consumption of media. Meanwhile, cellular providers have long been in something of an arms race to have the best and most reliable networks in an effort to attract and retain subscribers. This isn't just a U.S. phenomenon, either. While demand is particularly robust in mature markets like North America, it is also growing around the world in less developed regions that may offer stronger long-term growth prospects.
As a key provider to the companies that sell cellular service to consumers, American Tower is a picks-and-shovels play on the continuing growth in cellular usage globally.
American Tower's stock is down, and that's good for you
The compelling long-term growth story behind this REIT's business is widely known. And investors bid the stock up massively at one point because of the success it was having expanding. The market, as it is prone to do, might have gotten a little too excited and priced the stock for perfection.
No company is perfect and when American Tower suffered some headwinds, investors dumped the stock. Some of the negative issues were self-inflicted, like a costly investment in data centers that hasn't worked out as well as the company hoped. Some are just related to the natural ups and downs of the business, as customers pull back on network spending after a major upgrade cycle to 5G. The REIT seems strong enough to muddle through both with relative ease while continuing to grow its business for the future. For example, it bought $30 million worth of property in Spain and France in the second quarter.
In addition, the REIT's dividend in the second quarter was a hefty 10% higher than it was in the same period a year ago. While 10% dividend growth is down from the average annual growth of around 20% over the past decade, it's still a very attractive number. The deceleration in the dividend growth rate also makes sense, given that American Tower is a much larger company today than it was 10 years ago.
For the growth and income investor
While American Tower would probably be OK for a conservative income investor to own, the 3.5% yield, while historically high for the REIT, isn't exactly huge on an absolute basis. This stock is likely to be most appealing to growth and income investors, who will value the robust dividend growth and attractive long-term business prospects equally with the dividend yield. Yes, there are negatives today and Wall Street seems to have rethought its valuation of the REIT. But it's probably better to be about right with American Tower while it is offering a historically high yield than miss the opportunity waiting for the perfect entry point.
