T-Mobile (TMUS 0.57%) recently authorized a $14 billion share buyback program that will run until next September. Management expects to deploy $3 billion of that by the end of the year.
The buyback plan is a jump start on the plans management laid out at its virtual investor day last year, where it said it expected to return $60 billion to shareholders between 2023 and 2025. The early authorization to begin buybacks is a sign of strength for T-Mobile's free cash flow, will provide very good support to the share price, and should lead to strong earnings-per-share growth going forward.
This buyback is even bigger than it looks
That $14 billion is already a substantial portion of T-Mobile's $180 billion market cap. But its biggest shareholder has no plans to sell shares, either. "Deutsche Telekom AG, the Company's controlling stockholder, has no present intention of selling common stock pursuant to the repurchase program," T-Mobile wrote in the 8-K filing announcing the authorization. Indeed, Deutsche Telekom is working to build its stake in T-Mobile to 50% by 2024.
SoftBank still holds a substantial number of shares in the company as well. The Japanese conglomerate has been selling its shares to Deutsche Telekom since it received a T-Mobile stake as part of the merger with Sprint.
In effect, Deutsche Telekom and Softbank take about half the shares of T-Mobile out of the market. So the $14 billion buyback represents more than 15% of the available shares at today's price. That should offer very good support for the stock, providing downside protection for investors.
The impact on earnings per share
Reducing the number of shares over the next few years through buybacks will provide a big boost to earnings per share. Analysts already expect the company to show marked improvement in earnings next year, as it works through merger-related expenses and gains operating leverage. The Wall Street consensus calls for earnings per share to nearly triple next year to $6.41.
A continued reduction in shares outstanding and T-Mobile's market-leading position ought to support analysts' expectations for an average annual EPS growth rate of 59% over the next five years. That would put 2027 earnings per share at $22.59.
With the head start on the previously announced share repurchase plans, T-Mobile could outperform near-term EPS expectations. With a forward P/E ratio of less than 20 based on Wall Street's estimates, T-Mobile's stock already looks like a good deal.
The potential for 2026 and beyond
Management said it planned to return up to $60 billion to shareholders through 2025. The early start on share repurchases may suggest it will return even more. And by 2026, T-Mobile expects it'll produce over $18 billion in free cash flow annually.
That would put free cash flow generation on par with where its telecom rivals AT&T and Verizon were a couple years ago, ahead of big pushes to build out their 5G networks. With such strong free cash flow growth and a reduced number of shares outstanding, T-Mobile may make a more substantial commitment to shareholder capital returns by paying a dividend. Its more mature rivals have paid dividends for years.
A dividend is seen as a commitment from management to consistently return capital to shareholders. As such, management may elect to stick with buybacks, which offer much more flexibility on how to deploy capital or return it to shareholders. Regardless, investors should expect strong growth in free cash flow to support the stock price and see much of that come back to shareholders in one way or another.
