American Tower Could Show Double-Digit Dividend Growth

 | Jul 12, 2017 | 12:00 PM EDT
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Being a dividend investor shouldn't mean sticking only with old companies past their prime. Yes, dividend-paying companies tend to necessarily be mature companies, just because the payment of a dividend often means that management cannot find a better use of those funds. It's important for income investors to balance that out with dividend-payers that are growing faster, even if that means a lower yield.

American Tower Corp (AMT) is an excellent example of this. The biggest landlord of communications towers in the U.S. is a prime beneficiary of the meteoric rise of mobile data traffic on telecommunications networks. This growth is not only a matter of smart phone penetration, although this is important as well, but also of mobile data traffic per user, which just keeps climbing higher.

American Tower's results speak volumes. Last quarter revenue increased over 25% year on year, with net income increasing 9.3% and funds from operations (FFO) rising by 19.7%. For the last 16 quarters, American Tower has managed to grow FFO by double digits. Guidance for 2017 is for a 27% FFO increase. Increases are coming from a rise in tower leasing rates, a steady stream of tower acquisitions and new towers altogether.

Mobile data traffic is expected to grow by 30+% annually into at least 2021, and probably beyond that for at least a few years. The drivers behind this company's growth are secular and will be around for quite a long time.

At this time, American Tower spends most of its cash in expansions and acquisitions. Over the last 12 months, the company generated $2.8 billion. While the company spent just under $700 million of that in capital expenditure, American Tower spent another $725 million or so in acquiring some 2,000 towers in France from FPS Tower. Over the last 12 months, most of American Tower's free cash flow has been accounted for in acquisitions or capex. Even still, the company paid another $1 billion out in dividends, which today comes out to a yield of approximately 1.95%.

Management have stated that they would like to bump that dividend yield up to 3% over the next few years, and so I expect some serious dividend growth for that time period, perhaps 20% or greater. In my opinion, American Tower is at the point in its life cycle where the scale is tipping in favor of dividends. I believe now is a good time to get behind that trend on any weakness.

Shares have gone up and up on this one. I think it's best to wait and let the stock take a breather, and buy this one on any weakness. American Tower trades at over 23 times FFO, which definitely is not cheap.

Looking at this from a growth stock perspective, that gives us a PEG (price to earnings over growth) ratio of roughly one times, which is very reasonable. Even still, I believe we should wait for any pullback and buy on weakness, because shares have run up quite a bit over the last few years, as the above chart shows.

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