Actions of American Tower (NYSE: AMT) climbed 21% in the first half of the year as the company beat earnings estimates and overall investor sentiment improved for the real estate sector and 5G stocks.
The American tower is a REIT which owns and operates communications real estate, such as cell phone towers. It leases this equipment from telecommunications providers. Demand for data and mobile communications is a major driver of American Tower’s financial performance, and the share price is also influenced by investor demand for REITs and other income-generating stocks. As the chart above shows, American Tower returns were highly correlated with Vanguard Real Estate ETF (NYSEMKT: VNQ) and the Defiance Next Generation Connectivity ETF (NYSEMKT: FIVG).
American Tower remains an attractive income investment for those anticipating growing demand for wireless communications services. The REIT appears to be meeting a challenge posed by the merger of T-Mobile United States (NASDAQ: TMUS) and Sprint. This merger resulted in cancellations and non-renewals of leases in cases where both vendors rented equipment on the same tower. This headwind impacts 3% to 4% of American Tower’s total rental revenue, but the business is growing nonetheless.
Despite these challenges, American Tower has consistently exceeded analyst estimates and increased its quarterly dividend twice in the first half of 2021. It also announced the purchase of Telefonica‘s (NYSE: TEF) tower, which will result in even higher rental income.
American Tower provides low volatility exposure to the growth of 5G network deployment. The REIT’s income is quite predictable due to the long-term leases signed by the telecommunications providers. The stock’s current dividend yield of 1.75% is right in the middle of its range over the past few years, so it’s not particularly cheap or expensive on that basis. This yield is also slightly lower than that of other dividend paying stocks for income investors. The appreciation of American Tower will need to be fueled by continued dividend growth.
It is entirely plausible that American Tower’s dividend will continue to rise. It has grown steadily over the past decade, and economic trends around wireless communications should support the REIT. American Tower had a 50% dividend payout rate in the last quarter, indicating that it produced twice as much cash as it distributed to shareholders. It’s a healthy, sustainable level that certainly leaves room for growth.
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