An Update On American Tower

Summary

• American Tower shares haven't done much since my last recommendation, but dividends have risen.
• American Tower is at the point in its life cycle where it's generating substantial excess cash flow and dividends should grow markedly going forward.
• American Tower is priced reasonably and can be bought here.

American Tower Corporation (NYSE:AMT) is a great investment if you're looking for dividend growth. This company is behind the very strong trend of growing mobile data traffic, in both the US and the world, particularly from mobile phones but also increasingly from "the Internet of things." Think of American Tower as the builder of the infrastructure needed to carry mobile data:

Courtesy of AT&T Investor Relations.

This chart (from AT&T) is admittedly a bit dated, but it gives you the idea of where mobile data traffic has come from. While the next 10 years certainly won't see the exponential growth we saw over the last 10, American Tower expects 30% compounded annual data growth in the US as part of its "10-year plan."

American Tower is the biggest owner of communications towers in the US and, I believe, the world. It has a massive footprint of over 144,000 "communications sites," around the world, including 40,000 in the US and 58,000 in Asia (much of which, presumably, are in India). American Tower also is a faithful dividend payer, paying a dividend, and raising it, each year since 2012.

I don't often write about American Tower, not at least in "free" articles, due mostly to time constraints. The last "free" article I wrote about American Tower was back in June, where I called it a "buy for the future." At the time shares were at $134.

Courtesy of Yahoo Finance.

If you look purely at the stock price, shares haven't done much of anything since then. There's been some ups and downs, but the share price is pretty much where it was nine months ago. However, American Tower has since raised its dividend from 62 cents per share, per quarter, to 70 cents. That counts for a lot in my opinion. This article updates the one from nine months ago, and takes an updated look at American Tower's valuation and its performance as of late.

The cusp of maturity

Unsurprisingly, latest quarterly results were fueled by high growth. Revenue increased 10.7%, with EBITDA growth of 10.2%, and AFFO growth of 8% year-over-year (adjusted funds from operations grew 16.5% for the full year). Altogether, in 2017 American Tower grew its dividend 21%.

Immediate expectations also are quite good. This year management expects AFFO to grow another 10% or 11%, with property revenue increasing 7%. American Tower may not have the parabolic growth that it used to, but you will get a maturing business in the midst of a secular trend. Best of all, American Tower is in the stage of its life when it is really starting to throw off a lot of excess cash. Even after 21% dividend growth in 2017, the dividend is still only 39% of trailing 12-month funds from operations.

This means there's a lot of dividend growth to come, and the dividend should grow faster than FFO for the greater part of the next 10 years. I expect management to grow the dividend by well into the double digits (think 15%-plus) for the next five years at least, so long as trends persist, and I believe they certainly will.

Valuation

At 20 times trailing AFFO, American Tower certainly isn't cheap by any means, but it is priced reasonably here, and I think that's the most one can ask from a solid growth stock like this one. According to data from FAST Graphs, American Tower has averaged 21.2 times price to AFFO since its public offering in 2012. That's a discount of 6% to its average valuation. If dividend investors can get American Tower at anywhere below its average valuation, I think they should, and so I believe that American Tower is a buy right here.

Most of the upside is going to come in the form of higher funds from operations from now until 2020, and likely beyond. To be sure, American Tower is something you should buy and hold for multiple years at least. American Tower has more or less tracked its average valuation since going public, and so I would be surprised if there was much sudden upside. This is one that will take at lest a few years, but I'm confident it will be worth your while if you're an income investor.

Analyst’s Disclosure: I am/we are long AMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.