What happened
Shares of telecom giant T-Mobile US (TMUS -0.06%) were on the rise Thursday, appreciating as much as 4.3%, before pulling back to a 3.3% gain as of 1:30 p.m. ET, even on an otherwise difficult day for the S&P 500 and Nasdaq Composite.
T-Mobile announced yesterday at an industry conference that it would begin paying a dividend, which will start in the fourth quarter.
While investors actually sold off T-Mobile yesterday on some of the details surrounding that choice, it appears they are more enthusiastic today when reflecting on the conference. Moreover, there are certain dividend-based funds that couldn't own T-Mobile before, but now can. So, they may also be buying the stock today.
So what
Yesterday at the Goldman Sachs Communacopia & Technology Conference, T-Mobile CEO Mike Sievert appeared, and announced the change in capital allocation policy.
T-Mobile is just winding up its prior $14 billion share-repurchase program announced last September. So Sievert announced the company's new $19 billion capital return program that will go through 2024. However, this time, of that $19 billion, $3.75 billion is earmarked for a new dividend in addition to the share repurchases. That upcoming dividend payment would amount to about to about a $0.63 quarterly dividend, or $2.52 annualized, which would equate to a 1.82% dividend yield at today's stock price. In addition, Sievert said the company plans to raise that payout by about 10% annually.
It's a bit curious as to why T-Mobile sold off yesterday and is then bouncing back today. One wrinkle from the conference was that as part of the plan, Sievert also admitted the company may not reach its 2025 shareholder return targets set back at T-Mobile's analyst day in March 2021. At that time, T-Mobile had forecast returning $60 billion to shareholders through buybacks from 2023 to 2025. However, with the $14 billion program just completed and another $19 billion on the way through 2024, that would leave a hefty $27 billion to return in 2025 to reach that threshold. As part of the conference, Sievert did admit hitting that $60 billion may only be achieved in the first quarter of 2026, but not that much thereafter.
Some might have thought this was an indication the business may not be performing as well. But T-Mobile has delivered solid earnings and customer net additions as of late. While service revenue has come in strong, major telecoms are now competing fiercely over device subsidies, which are a bit more expensive than rate plan discounts. In addition, interest rates have gone up significantly since the March 2021 analyst day, with Sievert saying:
We're also going to move a little faster than expected next year toward our long-term leverage target in the mid-twos, as we've been talking about for a long time. And I think we'll be at about 2.5 [times EBITDA] next year. Given the broad macroeconomic inflation and cost of capital environment, we think that's a really smart place to be for our company.
Now what
The reduction in capital return through 2025 was a fairly minor tweak, so upon reflection, it appears investors don't think it's that big of a deal today. And it's probably a smart move for T-Mobile not to get its debt levels too high in this unpredictable interest rate environment and fast-changing telecom industry.
Moreover, T-Mobile has greatly outperformed rivals Verizon Communications and AT&T over the long term, even when their higher dividends are factored in. So dividend-focused mutual and index funds are likely champing at the bit to be able to own T-Mobile as well, or as a substite for the others.
