American Tower is an equity REIT, and its portfolio is composed of cellphone towers. American Tower is one of the largest cellphone tower owners in the world. The company reported owning 185,641 of these towers at the end of fiscal-year 2020.
The large cellphone carriers are American Tower’s primary tenants, includingAT&T (T), Verizon (VZ), and T-Mobile (TMUS). Lease payments from these three behemoths accounted for 55% of American Tower’s $8 billion of revenue in 2020. That still leaves another 45%. Lease payments from radio and television broadcasters, government agencies, and municipalities account for the remainder.
Towers in the United States and Canada generated 56% of the annual revenue last year. That said, more of the business is being generated over there. The rest of the world offers ample growth opportunities, particularly Latin America and Africa.
The 4G penetration rate is only 50% among the countries south of our border. It is a barren 10% in Africa. American Tower is positioning itself to supply the requisite infrastructure. It acquired Eaton Holdings for $1.85 billion in 2019. Eaton brings 5,500 sites across five African markets. Revenue generated in these markets increased 53% year over year in 2020.
American Tower bought Spanish telecom Telefónica’s tower business, Telxius Towers, for about $8.8 billion earlier this year. Telxius owns 30,722 communications sites in Germany, Spain, Brazil, Chile, Peru and Argentina. The Telxius acquisition should be a meaningful growth driver for the decade ahead.
As for growth in our own backyard. American Tower CEO Thomas Bartlet said that U.S. mobile data usage is expected to grow at a compound annual growth rate (CAGR) of more than 25%. He mentioned that 5G device adoption is still in the early days.
5G is the broadband cellular technology of tomorrow. Tomorrow fast approaches. The major carriers continue to invest billions of dollars annually for 5G coverage. The 5G infrastructure market is expected to reach $44.9 billion in 2025, up from $12 billion in 2020.
The company classifies as a REIT, with means it retains little of its earnings. Most of what it earns it must pass along to investors as dividends.
One number is more important than the others when relating numbers to individual shares. That is funds from operations (FFO). FFO is the cash flow that supports the dividend. As FFO goes, so goes the dividend, and so goes the share price.
Yes, American Tower’s share count grows, but the FFO per share grows faster. FFO (rather adjusted FFO, to be specific) increased 18.7% year-over-year in the second quarter to $1.1 billion. FFO exceeded dividend growth.
The dividend has grown 15% over the past year. That’s actually a conservative growth rate. American Tower could have afforded more. The payout ratio for the latest quarter consumed only half the FFO. Most REITs use 70% up to 100% of FFO to pay the dividend.
Management has guided for $4.3 billion in FFO for 2021. That distills to $9.50 per share. Based on the share price as I write, American Tower shares trade at 30 times current-year FFO. Within the REIT realm, the multiple is pricey.
But price is what you pay, value is what you get.
American Tower more or less operates in a duopoly (Crown Castle International is its primary competitor) with Hoover-dam sized barriers to entry. Demand for the company’s service appears insatiable. Its network of towers is already stressed by increased demand by data-hungry mobile applications like videoconferencing. The next wave of mobile data, which is 5G, is still in its infancy, and we haven’t really seen all the applications for it yet.
American Tower is an enviable long-term growth story in the REIT realm. The dividend grows at a 15%-to-20% clip annually. The yield of the future based on the price today will surely be higher.
I am more bullish than most analysts. I have a $320 price target for American Tower shares based on the 30 times FFO multiple applied to my projected FFO of $10.65 for 2022. I think it’s reasonable to pay 30 times FFO for exemplary business. After all, we’re in a market where many investors think nothing of paying 30 times revenue.
Buy American Tower shares up to $295.
Ian Wyatt and Stephan Mauzy, Personal Wealth Advisor, wyattresearch.com, August 6, 2021
|American Tower Corporation (AMT)
52-Week Low/High: $197.50 – 289.51
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