Why American Tower's Price Tag Doesn't Worry Me

American Tower (NYSE: AMT) isn't exactly a value buy right now. Trading at about $245 per share and just over 26 times its adjusted funds from operation (AFFO) at the time of this writing, it's one of the more richly valued real estate investment trusts (REITs) in the market today. While that's normally a signal to wait until a market correction to buy, there are several reasons American Tower's price tag doesn't worry me. Here's a closer look at why.

New opportunities

Until 2021, American Tower almost exclusively operated in the world of communications real estate, leasing mobile-phone and telecommunications towers to tenants such as Verizon, AT&T, and T-Mobile, among many others. During its 25 years in business, it's become one of the largest communications operators in the world and the second-largest REIT by market cap, in large part because of its portfolio of more than 214 communications towers in 25 countries. But communications towers are no longer its sole business. In late 2021, American Tower branched into the world of data centers with the acquisition of Coresite (NYSE: COR) in the fourth quarter.

The acquisition cost American Tower $10.1 billion but it added 25 data centers in eight major U.S. metro areas, giving the company new exposure to a vital piece of the technological world we live in today. The acquisition is projected to bring a 10% compounded annual growth rate (CAGR) for AMT. This strategic play will undoubtedly add value to AMT over the long term as demand for data storage and 5G services continues to increase.

Cell tower over city at night.

Image source: Getty Images.

Growth of 5G

Fifth-generation technology, or 5G, is quickly becoming the standard for wireless technology around the world. Given the robust and extensive infrastructure upgrades that are required to make 5G technology a reality for existing providers, operators with the greatest presence are most likely to benefit. Forecasts put 5G growth at more than 42% CAGR per year until 2028, meaning American Tower is in a strong position to profit in the future, particularly as demand from technologies requiring 5G, like virtual reality, the metaverse, video calling, and gaming continues to grow.

Strong historical performance

The need for cell towers has increased tremendously from when the company first got started in the mid-1990s, which has allowed American Tower to perform superbly over the past two decades, outperforming the S&P 500 for more than a quarter-century. Some believe long-term drivers and growth opportunities aren't as robust as they were during the dot-com boom, but I think technological demand is rising at even faster rates now that our world is more reliant than ever on telecommunications and data.

And the company's recent performance backs that up. Last year was a strong one for the company as wireless demand increased from pandemic-related drivers, like working from home. Year-over-year revenue jumped 19.2% as of Q3 2021, while billings grew 4.9% and AFFO increased 13.3%. The company has a debt-leverage ratio of 4.9, which is close to the maximum recommended limit of five for most REITs; however, it's still within a healthy level given the $8.7 billion in liquidity the company had at quarter's end.

Reliable dividend payer

Since 2012, American Tower has increased its dividend payments every quarter for 36 straight quarters. The company's payout ratio is 52%, a fairly low number relative to operating income. There's more than enough room to service debt obligations, expand the company's business, and increase payouts in the future. Given its track record of dividend growth, this makes it a fairly safe bet for long-term investors seeking reliable payouts.

American Tower's price tag isn't a cause for concern given its growth prospects, strong business model, and historic performance. Share prices are down 16% year-to-date amid market volatility, making right now time a great opportunity for investors to purchase shares of AMT at a slight discount.

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Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends American Tower. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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