Why did the American Tower jump 21% in the first half of 2021?

What happened

Shares in American tower (NYSE: AMT) rose 21% in the first half as the company beat earnings estimates and general investor sentiment for the real estate sector and 5G stocks improved.

AMT total return level Data from YCharts

American Tower is a REIT who owns and operates communication properties such as cell towers. It rents these devices to telecommunications providers. The demand for mobile data and communications technology is one of the main catalysts of American Tower’s financial performance, and its stock price is also influenced by investor demand for REITs and other income-generating stocks. As the graph above shows, American Tower’s returns were highly correlated to the Vanguard real estate ETF (NYSEMKT: VNQ) and the Defiance next-gen connectivity ETF (NYSEMKT: FIVG).

Worker climbing a cell tower.

Image source: Getty Images.

so what

American Tower remains an attractive income investment for people who anticipate growing demand for wireless communication services. The REIT appears to be facing a challenge arising from the merger of T-Mobile USA (NASDAQ: TMUS) and sprint. This merger resulted in some cancellations and non-renewals of leases in cases where both vendors rented equipment in the same tower. These headwinds affect 3 to 4% of American Tower’s total rental income, but the company is still growing.

Despite these challenges, American Tower still beat analyst estimates and increased its quarterly dividend twice in the first half of 2021. The company also announced the purchase of Telefonica‘s (NYSE: TEF) Tower business that will increase rental income even further.

What now

American Tower offers a low volatility exposure to growth from the adoption of the 5G network. The REIT’s revenues are fairly predictable due to the telecommunications providers’ long-term leases. The stock’s current dividend yield of 1.75% has been almost in the middle of its range over the past few years, so it’s not particularly cheap or expensive on that basis. This return is also slightly lower for income investors than other dividend stocks. The appreciation for American Tower needs to be fueled by continued dividend growth.

AMT dividend yield chart

AMT dividend yield Data from YCharts

It’s entirely plausible that American Tower’s dividend will continue to rise. It has grown steadily over the past decade and economic trends surrounding wireless communications should support the REIT. American Tower had a 50% Payout ratio in the most recent quarter, indicating that it produced twice as much cash as it paid out to shareholders. This is a healthy and sustainable level that certainly leaves room for growth.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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