T-Mobile (TMUS 0.57%) has a roster of major investors that may surprise you. First, the Oracle of Omaha, Warren Buffett, holds 5.2 million shares of T-Mobile inside his conglomerate, Berkshire Hathaway. Berkshire's stake represents less than 1% of T-Mobile's outstanding shares, but it has backing from one of the world's most legendary investors.
Japanese holding company Softbank owns about 61 million T-Mobile shares, or 5% of the company. The investment originated from Softbank's 2013 merger with Sprint, which later merged with T-Mobile in 2020. Later in 2021, Softbank sold most of its shares to Deutsche Telekom but retained its 5% allocation.
The deal made Deutsche T-Mobile's largest owner, with 48.4% of its outstanding shares. Though Deutsche holds fewer than half of T-Mobile's shares, it has majority voting power due to the voting agreement it has with Softbank as a result of the share sale. So, what do these heavyweights see in T-Mobile?
A new 5G wireless leader
The merger between Sprint and T-Mobile gave the combined company dominant infrastructure and spectrum licenses for the transition to 5G service in the U.S. that neither had before the merger. Its 5G midband network now covers 235 million Americans. On the other hand, Verizon has a C-band 5G network that covers 135 million Americans, and it plans to reach 175 million by the end of the year.
T-Mobile has constantly been the lowest-priced carrier of the big three (T-Mobil, Verizon, and AT&T). When you combine the lowest price with the best coverage, the results speak for themselves. During this year's second quarter, T-Mobile surprised investors by adding a head-turning 1.7 million postpaid wireless customers. AT&T also saw subscriber growth in the quarter but relied on promotional pricing to do so. Verizon lost postpaid subscribers.
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Perhaps the biggest boon to T-Mobile could be finalizing its merger with Sprint. Since the legal portion of the merger was complete in 2020, T-Mobile has dedicated a significant amount of its capital expenditures to rearranging cell sites, shutting down duplicates, and integrating the two networks. The company says the work will be finished by the end of September, and the associated costs will roll off the books. To put the impact of the cost reduction in perspective, T-Mobile spent over $3.1 billion on merger-related expenses in 2021 and generated $3 billion in net income.
T-Mobile's net income and cash flow profile should increase over the next few years. In the meantime, management will be tasked with allocating the extra cash in the best interest of extraordinary shareholders.
What does it mean for investors?
T-Mobile management has mentioned the possibility of repurchasing $60 billion of its shares between 2023 and 2025. Since T-Mobile's market cap is $180 billion and Deutsche owns roughly half, or $90 billion, a $60 billion share repurchase plan could retire two-thirds of the remaining $90 billion in free-floating shares. A share repurchase program would increase the percentage of ownership for the big three investors without them lifting a finger.
T-Mobile shares are up 24% this year and have trounced the S&P 500 by 40 percentage points. Wall Street analysts expect the company to earn $2.27 per share this year. After merger-related costs fall off, analyst estimates jump to $6.07 per share in 2023, which implies the stock is currently trading at a price-to-earnings ratio of 23.5 times 2023 earnings per share.
That might be a good deal for a fast-growing company with the potential for massive share repurchases over the next few years. So it's easy to see why seasoned telecom investors like Softbank and Deutsche Telekom like the stock. It goes without saying that Buffett knows a thing about stocks, too. Investors may want to ride their coattails and add T-Mobile to their own portfolios.
