This year has not been that great for the market in general. The staggering high inflation levels and soaring interest rates have pulled down the growth of several REITs (real estate investment trust). Boston-based American Tower Corporation (NYSE: AMT) is no exception as its stock is down almost 10% in 2022 so far.
That said, American Tower has been one of the best-performing REITs of the past decade. It has generated cumulative returns of 89% in the past five years, significantly outpacing the S&P 500 which had generated a total return of around 58% in the same period.
American Tower is one of the largest global REITs with a portfolio of approximately 221,000 communications sites and 27 data centers and has also been ranked 410 on the list of Fortune 500.
American Tower offers several advantages
American Tower operates in a niche space: Communication real estate. It can take advantage of huge economies of scale by renting out each of its locations to a variety of telecom operators. Moreover, its business also experiences lower recurring costs as once a piece of land is acquired and a tower is built upon it the amount of ongoing capital to run the business does not arise as such.
Further, in this inflationary environment, the built-in rent adjustments in its contracts provide it with necessary cushions to largely diminish the adverse impacts.
As more people start using mobile data for tasks like reading their emails, making purchases over the internet, or simply performing other daily activities, the demand for mobile data and cell towers will rise rapidly.
As per Market Research.com, the Global Telecom Towers Market will grow at a CAGR of 7.2% between 2021 to 2028 thereby providing companies like American Tower with immense growth opportunities. Besides, as American Tower operates in some of the top mobile data-using regions such as the U.S., India, Brazil, and Mexico the company has an added advantage.
American Tower continues to beat market estimates
One more reason for relying on the American Tower stock is its profitability in this inflationary market. In the first quarter of this year when most stocks had failed to perform, the REIT successfully exceeded the expectations of the market both in terms of revenues and earnings.
Its total revenue showed a 23% year-over-year growth to $2.66 billion. Besides, its net income also increased by 7.7% to $703 million and the EBITDA reached $1.62 billion representing a growth of 12.8%.
However, the REIT’s free cash flows did witness a reduction of more than 64% owing to the lower cash flows from its operations. The company said this was due to a non-recurring advance payment it had received from a customer back in the third quarter of last year in lieu of a payment that was due through the fourth quarter of 2022.
Furthermore, it anticipates that the advance payment will have a proportionate negative impact on its operating cash flow through the end of 2022 as well.
A dividend-paying stock
In today’s inflationary market when most people are losing out on their purchasing powers, having a source of passive income is immensely beneficial. American Tower can provide that to its investors in the form of regular dividends. The REIT has boosted its FFO by 120% in the past five years and has maintained an 18.27% dividend growth for the same period. With the increasing demand for data centres and new towers in the coming times, this REIT’s 2.27% dividend yield might continue witnessing double-digit growth in the years ahead.
American Tower closed July 6 at $258.23 and the average target price for the stock is $290.38 which is a potential upside of around 12.45%. American Tower has got plenty of growth opportunities. Driven by the rising usage of data the demand for data infrastructure will continue witnessing growth.
Moreover, the shift to the 5G network can also provide the REIT with a much faster growth momentum as that would require the support of more cell towers. The stock is currently priced at 43.6 times its earnings which is quite reasonable considering its future prospects.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
