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T-Mobile US (TMUS) has been a stellar performer in the American telecom scene, as it gained considerable market share over its rivals - including AT&T (T) and Verizon (VZ) - through the years. Undoubtedly, staying competitive in the wireless and fiber markets does not come cheap, especially in a higher-interest rate environment.
And as T-Mobile joins its two peers by paying out a dividend, there may be growing concern that the top-performing telecom's best growth days may be coming to a close.
T-Mobile's First Dividend: A Sea Change for the Telecom Top Dog?
It's not a mystery why investors weren't happy with T-Mobile's decision to pay its first-ever dividend starting in the fourth quarter. The company has done just fine for investors without having to pay a dividend.
The payout is part of T-Mobile's $19 billion shareholder return program, which also includes a $15.25 billion plan to repurchase shares through 2024. Looking through 2025, T-Mobile expects to give back around $60 billion to shareholders. That's a big deal, but don't expect T-Mobile to shed its growth edge just because it's ready to line the pockets of its loyal shareholders.
Undoubtedly, a dividend commitment and a buyback come at an opportunity cost. These programs pull cash out of potential growth investments in telecom tech. That said, I think the market's initial negative reaction to the shareholder return program is a tad overblown.
Personally, I'd rather T-Mobile pursue buybacks over dividend payments, given the stock is looking relatively cheap after trading sideways for nearly three years. Buybacks can be such a great thing when shares of a company are undervalued.
As of this writing, TMUS goes for just 26.43 times trailing price-to-earnings, well below the five-year historical average of 45.4 times. Historically speaking, T-Mobile stock looks to be the cheapest it's been in years.
Of course, it can be a tough task to strike the right balance between returning capital to shareholders alongside growth initiatives (such as the 5G buildout). That said, I'm willing to give T-Mobile's management team the benefit of the doubt as it begins to reward investors for sticking it out with a stock that hasn't really been able to deliver on the front of capital gains in recent years.
For now, T-Mobile is generating impressive amounts of cash flow growth as it continues to edge out its rivals in the competitive telecom scene. Having ample cash is never a bad thing, and I do think buybacks will enhance the value proposition as this gloomy market begins to undervalue the telecom top dog.
T-Mobile's New Dividend Yield to Be Less Than 2%
T-Mobile isn't about to challenge the likes of AT&T or Verizon in terms of yield when its first dividend is due to be paid. T-Mobile's coming dividend, which entails a $0.63 quarterly dividend, will entail a yield of 1.8% as of Thursday's closing price of around $140 per share.
That's still a far cry away from the passive income provided by its two telecom rivals. Today, AT&T sports a massive 7.4% yield, while Verizon boasts a jarring 8.1% yield. But after enduring painful multi-year plunges, the best course of action for T-Mobile's top two peers may be to reduce their payouts substantially. Perhaps a 75% cut may be the sweet spot for the two telecom giants.
Though I'm sure AT&T and Verizon shareholders wouldn't take too kindly to such a colossal dividend reduction, I think it's for the betterment of the firms as they look to take their growth profiles to the next level.
For now, a yield in the 1.5-2% range seems to be the sweet spot. Such a modest payout still allows a firm to keep its foot firmly on the gas in terms of growth.
The Bottom Line on TMUS
Don't expect T-Mobile to take a page out of the playbook of its inferior two peers by starting to pay a fat dividend. The company is still very much in growth mode and is primed to keep winning versus its two telecom competitors.
While I have mixed feelings about the new dividend, I am a fan of T-Mobile's planned buybacks. The stock does look cheap, with the average analyst price target of $179.88 pointing to north of 27% upside to be had from current levels.
