T-Mobile (NASDAQ:TMUS) announced a $1.5 billion buyback on Wednesday morning. That $1.5 billion is well below what many analysts were expecting after T-Mobile's bid for Sprint fell through. Analysts' estimates for the buyback reached as high as $17 billion over three years. The current $1.5 billion authorization expires at the end of next year.

But CFO Braxton Carter expects that $1.5 billion won't make it to the end of next year. T-Mobile is being very conservative with its authorization as it simply tests the waters. Carter expects T-Mobile to repurchase between 2% and 3% of shares outstanding with the authorization.

In that same regard, COO Mike Sievert says management's focus is now on unlocking the value it accrued over the last five years of growth. That means a larger focus on free cash flow and capital returns, although there's not much interest in a dividend right now.

T-Mobile store in Times Square

Image source: T-Mobile.

No debt needed

Significantly, T-Mobile isn't going to need to take on debt to fund its capital return program. It wouldn't make much sense if it did. Its credit rating still sits below investment grade at BB+, according to S&P Global Market Intelligence, and net debt has creeped up to $27.5 billion from less than $20 billion after the first quarter last year. Carter noted it will "delever organically," and management is aiming to maintain a debt-to-capital ratio of 3 to 4.

T-Mobile expects free cash flow to greatly surpass the $1.5 billion repurchase authorization next year. It's already brought in $1.6 billion in the first three quarters of 2017. By 2019, management expects to produce about $4.5 billion in free cash flow. That's more than enough to support $1.5 billion returned to shareholders.

T-Mobile expects its free cash flow to increase between 45% and 48% per year in 2018 and 2019. Investors don't expect that rate to slow too much in the next decade, either. Rapidly increasing free cash flow, as a result of greater scale and lower investment needs, should provide much more room to increase the share repurchase authorization.

How much room is there?

T-Mobile should produce over $3 billion in free cash flow next year based on its outlook for 45% to 48% compound annual growth through 2019. So it's going to return less than 50% of free cash flow to shareholders.

For reference, AT&T paid out over 70% of its free cash flow as dividends. It's slowed its repurchasing activity since going on an acquisition spree. Verizon Communications paid out more than 80% of free cash flow as a dividend last quarter. It's also authorized to buy back 100 million shares by 2020, which is currently about $5 billion.

Granted, AT&T and Verizon are generating significantly more cash flow than T-Mobile at this point in time. But with the company's biggest investments in its network and retail footprint slowing down and its customer base continuing to grow, free cash flow should have several more years of strong growth. The excess cash flow can go right back to shareholders as T-Mobile morphs from a growth company to a cash flow story. As such, the capital returns ought to significantly outpace the growth in free cash flow, which is already expected to boom.

Adam Levy owns shares of VZ. The Motley Fool owns shares of and recommends VZ. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.