SBA Communications (NASDAQ: SBAC) has a long history of creating shareholder value. Over the last decade, the communications infrastructure company has generated a more than 565% total return. That has crushed the S&P 500's nearly 290% total return during that time frame.
However, the infrastructure real estate investment trust, or REIT, has cooled off considerably since the beginning of 2020. While the REIT has produced a nearly 13% total return, that's roughly half the performance of the S&P 500. Further, shares are currently 18% off their highest level during that period. This recent weakness leads to the question of whether now's a good time to buy or if SBA Communications' market-beating days are in the rearview mirror. Here's a look at the case for and against buying shares of the infrastructure REIT right now.
The case for buying SBA Communications
Despite its relative underperformance, SBA Communications is coming off a strong year. The REIT grew its AFFO per share by 11.2% for the full year. Further, its growth rate accelerated in the fourth quarter to 18.8% year over year. That enabled it to produce "material growth in AFFO per share well ahead of plan," according to CEO Jeffery Stoops' comments in the earnings press release. He noted that the "fourth quarter was our strongest of the year in terms of customer activity." That excellent financial performance enabled SBA Communications to boost its dividend by 25%.
The company sees more growth ahead. It recently signed a new master-lease agreement with DISH Network (NASDAQ: DISH) to help it deploy its coast-to-coast 5G network in the U.S. It also acquired licenses from utility Pacific Gas and Electric (NYSE: PCG) that allow wireless carriers to attach their equipment to some of its electric transmission towers and other utility structures. Finally, the company expects to benefit from recent spectrum auctions in the U.S. and those planned in international markets in the coming years. They should drive additional demand for communications infrastructure in the next couple of years.
Finally, despite the significant dividend increase, SBA Communications' payout has more upside potential. The REIT currently has a conservative dividend payout ratio of less than 23% of its 2021 AFFO at the midpoint of its guidance range after its recent 25% boost. Because of that, it should be able to continue growing its payout at a fast pace while using its retained cash to make additional investments, repurchase stock, and enhance its balance sheet.
The case against buying SBA Communications
One concern with SBA Communications is its leverage ratio. The REIT ended 2020 with a leverage ratio of 7.1 times. While that's down from 7.6 times in 2016, it's on the high end for an infrastructure REIT. For example, rival American Tower (NYSE: AMT) targets a leverage ratio between 3.0 to 5.0 times. Because of that, American Tower has more flexibility to make needle-moving deals. That allowed it to recently buy Telxius Towers for $9.4 billion, temporarily increasing its leverage above 5.0 times. If market conditions deteriorate, SBA Communications' debt could weigh on its stock price and hinder its ability to make growth-focused investments.
Despite the double-digit decline in its stock price from its recent high, SBA Communications shares still trade at a premium valuation. At the midpoint of its 2021 guidance range, the REIT expects to generate about $10.21 per share of AFFO. With its stock recently trading at $265 a share, it sells for about 26 times its AFFO. That's still slightly more expensive than infrastructure REIT rivals Crown Castle International (NYSE: CCI) and American Towers, which both trade closer to 24 times their projected 2021 AFFO. While SBA Communications has been growing faster than its larger rivals, it has more leverage and a lower dividend yield, making it harder to justify the premium price.
There's a lot to like at SBA Communications
While SBA Communications has a higher leverage ratio and trades at a premium price, it still looks like a compelling buy for long-term investors. With the REIT's shares off by nearly 20% from its recent high, it's cheaper than it had been, making it more attractive considering its long-term growth prospects. Add that to the overall downward trend in its leverage ratio and the upside ahead as 5G infrastructure rollouts accelerate, and the REIT should get back on its market-beating track.