Analysis of American Tower: Brilliant business model and great management at a high price
While it's not fun that the markets are down, it's great that we can buy some quality stocks at fantastic prices. And since buying great stocks at great prices is the foundation of any successful strategy, let's take advantage of the opportunities we're getting. Could one of them be American Tower Corporation $AMT+1.1%, for example?
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Background
American Tower is an American company founded in 1995 that specializes in owning and operating wireless towers and towers around the world. The company provides infrastructure for mobile operators, cable companies, internet providers and other telecommunications companies.
It is a company with a high market capitalization and stable earnings. The company has a strong market position due to its extensive portfolio of transmitters and towers that provide critical infrastructure for telecommunications companies. American Tower also has a strong international presence and operates in many countries around the world.
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As of March 2023, American Tower has a market capitalization of approximately $93.72 billion and a current dividend yield of approximately 3%. In 2021, the company reported total revenues of $9.4 billion and net income of $1.8 billion.
In 2021, American Tower completed the acquisition of Cignal TV, which strengthened its market position in Asia and allowed the company to expand its portfolio of transmitters and towers. The company also announced plans to invest in expanding its infrastructure in the US and abroad.
This company has kind of got it all. It comes with a 3.0% dividend yield, consistent dividend growth, a 66% (forward) AFFO (adjusted funds from operations) payout ratio, and a bulletproof business model that comes with growth. Their core business is leasing space on communications sites to various tenants, including wireless service providers, radio and television stations, and government agencies.
American Tower's portfolio consists primarily of towers (Surprise) that it owns and operates under long-term leases. The terms of the leases typically include an initial term of five to ten years with multiple renewal options. Annual rent increases are typically set at an average of approximately 3% in the United States.
https://www.youtube.com/watch?v=AdVerrf1Lgc
This means that if inflation accelerates above 3%, the company's core business suffers somewhat. This is currently the case and the reason why the stock price is falling. But more on that later. In addition, it owns a portfolio of interconnected data centers and related assets in the U.S. that it leases to enterprises, network operators, cloud providers and support services.
Given this, the company's costs are largely fixed. Costs include rent for the land (on which the towers are located), property taxes, site maintenance, insurance and monitoring. In addition, capital expenditures are subdued. On average, the company spends 2.4% to maintain capital expenditures.
The CEO cited three main reasons for buying the stock:
- Demand: The demand for American Tower's services is driven by the growing need for broadband wireless, which is a worldwide phenomenon. Large wireless service providers are investing in their networks to meet this demand, which requires more space on American Tower's properties. This ongoing demand creates a steady source of revenue. In addition, it allows the company to leverage its operating leverage. The growth in demand includes the expansion of 4G in certain areas, the advancement of 5G in more mature countries and regions, and preparation for what the Internet of Things could look like where we take connectivity to the next level. Not only are these trends expected to rapidly increase the demand for data, but we can also expect it to require more hardware on towers, not less.
- Business Model: The tower model is considered one of the best business models in the world. American Tower enters into long-term contracts with customers who occupy space at its sites. The company has large pass-through revenues that flow through from revenue to EBITDA. The tower model presents a significant barrier to entry for competitors.
- Performance: American Tower has a history of strong financial performance. The company is a leader in ESG, energy and fuels, which is key to decarbonisation globally. The company has also made a large acquisition dealing with data centers in the United States, creating opportunities for value creation as the edge develops and as 5G becomes ubiquitous around the world.
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Dividends and Balance Sheet
Considering the above, the company yields about 3%. Its dividends have grown for ten consecutive years, and the average annual dividend growth rate over the past three years is 15.7%. The company typically raises dividends several times a year. The most recent increase was announced in December 2022, when management increased by 6.1%. On a full-year basis, the company plans to increase the dividend by 10%. That's a lot since we're dealing with a stock with a 3.1% yield. These increases add up over time.
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AMT stock has suffered, but less than its benchmark. Over the past three years, AMT has returned 55%. It outperforms the sector by about 25 points. That includes a 30% decline from its all-time high due to rising inflation, higher rates and worse investor sentiment. AMT has an absolutely brilliant and bulletproof business model that is complemented by great management that is aware of its qualities. Unfortunately, investors are also aware of this and the company is valued really highly.
It should also be said that AMT has a great balance sheet. 78% of its debt is fixed, which protects it from a sharp rise in interest rates. The same goes for the weighted average remaining debt maturity, which is 5.6 years. The company is thus gaining valuable time. In addition, the company has reduced the leverage of its balance sheet.
In 2023 and 2024, management will focus on further reducing the net leverage ratio to 3-5x EBITDA. After that, dividend growth could accelerate further if new business and interest rates allow.
Personally, I like the company. Unfortunately the price is really high despite the current downturn. I already have a few more REITs on top of that. Anyway, I'll keep an eye on AMT though.
Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.