Growth stocks and AT&T, Verizon Communications and T-Mobile U.S. do not have much in common, though 5G broadband services have been a bright spot for the phone companies. When fourth quarter earnings come in for T stock and VZ stock, investors will be looking for signs that the dividends and buybacks that drive the telecom stocks are in safe order.
For investors in telecom stocks, free cash flow growth and similar financial metrics are key. The big three wireless firms have pulled back on aggressive promotions, aiming to improve profit margins. Investors will be looking for management views on whether a less intense wireless competitive environment will continue.
"We expect the wireless carriers to offer up a constructive outlook for 2024 at Q4 results," said Bank of America analyst David Barden in a report. "Wireless carriers will likely guide to rising prices, expanding margins, moderating capex, expanding free cash flow, accelerated deleveraging and rising dividend security. We believe the incumbent wireless companies are well positioned to outperform cable in 2024 with improving financials and having shown the market that cable's wireless inroads have not come at their expense."
Fourth quarter earnings for Verizon stock are due Jan. 23. Q4 earnings for T stock are due Jan. 24. Earnings for TMUS stock are due Jan. 25.
In 2024, analysts project flat earnings for AT&T while Verizon earnings are expected to dip 2%. Adjusted profit for TMUS stock is expected to rise 39%.
Analysts estimate 1% revenue growth for both AT&T and Verizon and 3% for TMUS stock.
"Much of the focus will be on formal 2024 guidance, although each of the Big 3 has already provided many of the piece parts, which include solid wireless service revenue growth, productivity initiatives, falling capital spending and good FCF (free cash flow) growth," said Morgan Stanley analyst Simon Flannery in a report.
Telecom Stocks: 5G Broadband
"We expect another robust FWA quarter at close to 1 million net adds across the Big 3, with AT&T's recent Internet Air launch potentially surprising to the upside," Flannery also said.
T-Mobile and Verizon are furthest along in rolling out 5G wireless broadband to homes, called "FWA," for fixed wireless access within the industry. 5G broadband growth has pressured cable TV stocks such as Comcast and Charter Communications.
In the September quarter, the three phone companies added 966,000 5G broadband subscribers. T-Mobile led with 557,000, Verizon added 384,000 and AT&T signed up 25,000. T-Mobile is targeting 7 million to 8 million fixed 5G wireless subscribers by 2025. Verizon is targeting 4 million to 5 million.
At TD Cowen, analyst Gregory Williams has a similar view on upcoming earnings reports.
"The focus will naturally be on 2024 initial guidance," he said in a report. "We expect T-Mobile to guide conservatively and eventually beat as usual. Verizon could guide upside EBITDA (earnings before interest, taxes, depreciation and amortization) but nonoperational FCF headwinds may keep excitement in check. AT&T already pre-announced 2024 FCF commentary, but with many moving parts."
Both T stock and VZ stock underperformed in 2023 and 2022 while TMUS stock gained 14% last year and nearly 21% in 2022.
AT&T has struggled to prop up the free cash flow that supports its dividend. Verizon offers an attractive dividend but hopes for a buyback have been delayed. Deutsche Telekom-controlled T-Mobile has been ramping up a sizable buyback, which could hit $60 billion by 2026.
Phone Stocks Better Than Cable TV?
While T-Mobile continues to grab market share for high-spending subscribers, even its revenue growth has slowed amid a mature wireless market. Most consumers own mobile phones. Industry subscriber growth has been supported by companies issuing phones to employees, children being given phones at younger ages and subscribers upgrading from pay-as-you go "prepaid" plans to monthly "postpaid" plans.
At UBS, analyst John Hodulik says the big phone companies are better positioned than cable TV firms heading into 2024.
"We continue to prefer Wireless given relatively stable competition and improved profitability while cable continues to see pressure from broadband subscriber losses amid macro trends and fixed wireless/fiber competition," he said in a report.
Hodulik added: "We believe the U.S. wireless sector is healthy and competitive issues are manageable."
Rising interest rates and Treasury bill yields have been a headwind for dividend paying stocks. But the Federal Reserve has signaled that its policy tightening campaign is over. Wall Street analysts project potential interest-rate cuts in 2024.
In early 2024, VZ stock won two upgrades to outperform from Wolfe Research and KeyBanc Capital Markets.
Management changes continue. Verizon in December hired a new chief marketing officer, Leslie Berland. She held the same position at Peloton Interactive.
Deutsche Telekom, SoftBank Settle Merger Overhang
Meanwhile, an overhang on TMUS stock was removed in December when Deutsche Telekom and former T-Mobile parent SoftBank resolved an issue dating back to the Sprint merger in 2020. T-Mobile issued 48.8 million shares, valued at $7.6 billion, to SoftBank at no cost.
Since mid-2022, Deutsche Telekom has owned a majority stake in T-Mobile.
Deutsche Bank analyst Bryan Kraft holds a buy rating on TMUS stock.
"T-Mobile continues to grow market share gradually and lead the industry in postpaid phone net adds," Kraft said in a report. "We expect this dynamic to continue in 2024, leading T-Mobile to have the highest revenue growth rate in the industry. The operating leverage from faster revenue growth, announced cost initiatives, growth in FWA (5G broadband) subscribers and a lack of exposure to legacy wireline revenue declines combine to also drive the highest EBITDA and FCF growth in the sector."
Craig Moffett, analyst at MoffettNathanson, is cautious on both phone and cable TV stocks.
"As we start the new year, sentiment in cable is sour," Moffett said in a report. "In wireless, less so. Indeed, there is a growing sense of optimism in some corners of the wireless investing universe. While few investors harbor illusions that wireless is actually a good business, the prevailing narrative in wireless is that competitive intensity is abating; all the carriers desire price increases, or so goes the narrative, and they are willing to accept slower growth in return. We don't quite buy that narrative."
Follow Reinhardt Krause on X, formerly called Twitter, @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
