Why dividends matter for REITs
In order to qualify as a real estate investment trust (or REIT), companies like American Tower Corporation (AMT) are required to pay at least 90% of their taxable income to investors in the form of dividends or share repurchases. This gives the companies several tax benefits.
REITs fund their shareholder returns from rental income, which provides a secure and continuously flowing fund for dividends in the form of rental rates. This income is directly proportional to inflation.
American Tower (AMT) has been paying consistent dividends to its shareholders in every quarter since it became a public company in 2011. On June 1, 2017, the company announced a quarterly dividend of $0.64 per share, resulting in an annualized dividend of $2.56 payable on July 14, 2017, to shareholders of record on June 15.
The recent dividend announcement is 3.2% higher than the company’s dividend announced during 4Q16. American Tower has raised its dividend every year by an average of 23.7% in the last five years. It raised its dividend 22% in fiscal 2016.
AMT has maintained a consistent dividend yield over the last two years. Its dividend yield was ~1.8% in 2015 and ~2.0% in 2016. Analysts expect American Tower to maintain respective dividend yields of ~2.0%, ~2.4%, and ~3.0% for 2017, 2018, and 2019.
American Tower comprises 7% of the PowerShares Active US Real Estate ETF (PSR). PSR has a yield of ~2.9%.
FFO payout ratio
The FFO (funds from operations) payout ratio is calculated as the ratio between the dividend per share and diluted FFP per share for a given period. It gives investors an idea of the shareholder return of a particular stock, and it implies the amount a company distributes as a dividend out of its FFO.
AMT’s FFO payout ratio was 39.2% in 1Q17. The company’s expected payout ratios in the next four quarters are 40.5%, 41.1%, 42.2%, and 42.9%, respectively, for 2Q17, 3Q17, 4Q17, and 1Q18. The chart above shows the estimated dividend payout trend for the next four years.
American Tower also returns value to shareholders in the form of share repurchases. During 1Q17, the company repurchased ~1.9 million shares of its common stock worth $225 million. At the end of 1Q17, American Tower repurchased ~1.7 million additional shares worth $213 million.
If we consider other REITs by comparing FFO payout ratios, we find that the payout ratio of AMT was in line with its competitors. Crown Castle International (CCI) had an FFO payout ratio of 76.3%, Realty Income (O) had a payout ratio of 83.1%, and Simon Property Group (SPG) had a payout ratio of 59.8%.
In the next article, we’ll see how the company performs in terms of leveraging its debt level.