I built my portfolio from the bottom up, by first finding attractive companies and then worrying about how they fit into the bigger picture. But now that I have a few dozen investments, new stocks have to compete with old stocks for cash. I love American tower (NYSE:AMT) and have considered buying it several times, but every time I look at it I come to the same conclusion: I like what I already own more. This is why I think American Tower is a great company but still hasn’t bought the stock.
American Tower is the backbone of the future
I had a rotary phone growing up. Some people won’t even know what that is. It was a huge upgrade when my family bought their first cordless phone (not a cell phone, just cordless). To me, the idea that we can carry a phone in our pocket and make calls with a wristwatch comes from the Dick Tracy comics. But it is very clear that the future will be increasingly mobile.
To give you some numbers: American Tower expects the number of mobile devices to increase by 7% annually over the next five years. This should be driven by the slow growth of mobile phones and a rapid increase in the number of Internet of Things devices. This growth, plus rising media consumption on mobile devices, will significantly increase the amount of data traveling over wireless networks. The amount of data per device is expected to increase by 12.5% per year over the next five years.
And that’s just the developed and largely saturated US market. Emerging markets have the potential to grow even faster, which is why American Tower is expanding its operations around the world. Each cell tower, meanwhile, can be very profitable for the Real Estate Investment Trust (REIT). A three-tenant tower can, which is not unusual, have a gross margin of 83% and a return on investment of 24%. So the future looks quite bright.
Meanwhile, interest rates are rising, putting pressure on yield investments such as REITs. Investors are a bit miffed that American Tower made a major investment in data centers that didn’t go as expected. And capital spending in the telecom sector is cooling after a big push to move to 5G. Investors are bearish on American Tower today, pushing the stock down about 40% from its 2021 high. The yield is near its highest level in history at 3.5%.
And yet I still don’t own American Tower
I really like the story behind American Tower, but it’s best suited for investors focused on dividend growth. This is supported by historical dividend growth of around 20% over the past ten years. Even the 10% increase over the past year is still quite high.
The problem for me is that I don’t own REITs for fast dividend growth. I own REITs with the expectation that they will give me attractive returns and slow appreciation. I see them as a fundamental income investment. The other REITs I own, such as Real estate income (NYSE:O) And Federal Real Estate (NYSE: FRT), better fits my expectations for a REIT investment. And they have a much longer dividend history than American Tower, which is still a fairly young REIT.
There is another reason. I am willing to make exceptions for companies that I find attractive. American Tower is attractive in my opinion. But I already own several other REITs. With half a dozen in my portfolio, I’m hesitant to add any more REITs.
The risk of overexposure to one sector is clearly visible today, given the impact that rising interest rates have had on virtually all REITs (the average REIT is down about 30% since the start of 2022). I’m a fan of diversification, so adding more REITs to my portfolio would be counterproductive. My preference is to simply add more to what I already own. Otherwise, I would like to replace a current holding company with American Tower. Except, as mentioned, I love what I already own.
You don’t have to swing at every pitch
Warren Buffett has an interesting saying. To paraphrase, Wall Street throws pitches at you all day long, but there’s no one calling balls and strikes. You can swing whenever you want, or just sit and let the pitches go by. I like American Tower stock, but it doesn’t fit in my portfolio right now.
10 stocks we like better than American Tower
If our analyst team has a stock tip, it could be worth listening to. The newsletter they have been publishing for more than ten years, Motley Fool stock advisorhas tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and American Tower wasn’t one of them! That’s right: They think these 10 stocks are even better buys.
View the 10 stocks
*Stock Advisor returns September 11, 2023
Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool holds and recommends positions in American Tower. The Motley Fool recommends Realty Income. 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.