I’ve owned shares of American Tower (AMT) since before the data infrastructure company converted into a real estate investment trust (REIT) over a decade ago. That investment has paid off over the years. The company has since initiated a dividend (that has grown significantly) while also delivering attractive stock-price appreciation.

While I have added to my position several times over the years, I’ve been an especially heavy buyer this year. Here are the main factors driving my more recent buying binge.

Reaccelerating raises
American Tower has increased its dividend every year since becoming a REIT in 2012. It’s grown that payout briskly over the years, delivering more than 20% compound annual growth from its initial rate.

While growth has slowed in recent years, American Tower still delivered robust dividend growth. Its payout was up 12.5% in 2022.

Dividend growth had gotten even slower this year. American Tower didn’t increase its dividend in the first quarter, marking the first time it didn’t give its investors a quarterly raise since it started paying dividends. Meanwhile, the second-quarter’s increase was only $0.01 per share above the first-quarter level (a 0.6% quarter-over-quarter increase and 9.8% above the year-ago level).

However, the company’s dividend growth rate has started to accelerate. American Tower recently declared its third-quarter dividend payment, which was 3.2% above the second-quarter level (and 10.2% above the year-ago period). That accelerated upward trend should continue, given American Tower’s guidance that it would pay $3 billion in dividends in 2023, representing 10% year-over-year growth per share.

A compelling value
While American Tower’s dividend has continued growing this year, its stock price has gone in the opposite direction. That has driven up its dividend yield while pushing down its valuation.

Shares of the REIT have declined by more than 20% this year and currently trade at less than $165 apiece. That’s pushed its dividend yield up to 4% — an historically high level for American Tower, which has typically traded at a dividend yield closer to 2%. It’s also more than double the S&P 500‘s dividend yield (recently around 1.6%)

Meanwhile, American Tower expects its adjusted funds from operations (FFO) to be between $9.61 and $9.79 per share this year. That put its price-to-FFO ratio at around 17x. That’s well below the more than 20x FFO multiple American Tower has typically fetched.

Reaccelerating growth is still ahead
The primary factor weighing on American Tower’s stock price has been the headwinds impacting its growth. The REIT anticipates that its adjusted FFO will decline by less than 1% this year, driven by higher interest rates, a customer merger, and some other factors.

These headwinds mask the strong underlying performance of the company’s portfolio. Demand for space in its towers and data centers remains strong. That drove over 6% organic tenant billings growth in the first two quarters of this year.

The tailwinds driving this growth (5G, AI, and business transformation) remain firmly in place. That’s driving the REIT to continue investing money to build additional infrastructure to capitalize on these drivers. It’s investing over $1.5 billion to build additional international towers and expand its U.S. data center platform.

These investments, along with continued strong demand for its existing infrastructure, should drive a reacceleration in adjusted FFO per-share growth as its other headwinds fade. That will enable the REIT to continue increasing its dividend at a healthy rate.

Increasingly attractive
American Tower has become a more enticing investment opportunity this year. Shares have fallen even though the company continues to increase its dividend. Because of that, it trades at a higher dividend yield and a lower valuation.

While it’s facing some near-term headwinds, the long-term growth thesis remains intact. Because of that, I plan to continue buying shares as I have cash to invest.

— Matthew DiLallo

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Source: The Motley Fool