While telecom giants AT&T (T +0.42%) and Verizon (VZ 0.40%) are known for paying generous dividends to investors, T-Mobile (TMUS +0.28%) has avoided paying dividends up until now. The company has returned cash to shareholders in the form of share buybacks, but never direct dividend payments.
That changes later this year. T-Mobile announced on Sept. 6 that it plans to declare its first quarterly dividend in the fourth quarter, with an expected total payment of approximately $750 million. In 2024, the company expects to pay out about $3 billion in dividends split across four quarterly payments. Based on the current share count, that works out to a quarterly dividend of about $0.63 per share.
One reason to avoid T-Mobile stock up to this point was its lack of a dividend. With the company set to dole out payments to shareholders, is it time to buy the stock?
NASDAQ: TMUS
Key Data Points
A small dividend with room for growth
T-Mobile's dividend won't be all that enticing to start. Based on the current stock price, the forward dividend yield works out to about 1.8%. That's slightly higher than the dividend yield of the S&P 500, but it pales in comparison to the yields offered by AT&T and Verizon.
Both AT&T and Verizon stocks currently sport dividend yields in excess of 7%, partly because the stocks have tumbled over the past year. T-Mobile's low dividend yield is a function of the stock being somewhat expensive, at least compared to its telecom rivals. T-Mobile expects to generate an adjusted free cash flow of about $13.4 billion this year, putting its price-to-free-cash-flow ratio at about 12. For AT&T, the same valuation ratio is just 6.5.
T-Mobile's dividend will almost certainly grow much faster, though. The company expects to increase its per-share dividend payments by about 10% annually. With AT&T and Verizon bogged down with debt and already-high dividend payments, dividend growth for both will be minimal. Verizon announced a 1.9% dividend increase on Thursday, and AT&T hasn't raised its dividend in years.
On top of the new dividend, T-Mobile is also reupping its share buyback program. The company has authorized an additional $15 billion for share buybacks, with plans to use that money before the end of 2024. This is on top of the $14 billion authorized in late 2022.
Stiffer competition
When a company starts paying a dividend, it's often a sign that it sees no better place to invest the cash it's generating. That's a double-edged sword. On the one hand, T-Mobile has greatly increased its free cash flow generation. But on the other hand, the company may have limited growth opportunities ahead of it.
Speaking at the Goldman Sachs Communacopia + Technology Conference, T-Mobile CEO Mike Sievert noted that the wireless industry was getting more competitive. T-Mobile's competitors have leaned on device subsidies to score new subscribers, which is an expensive customer acquisition strategy. "...it costs more to compete now than it did, say at the height of the pandemic a couple of years ago," said Sievert.
Cable companies acting as mobile virtual network operators and offering inexpensive wireless plans to subscribers are also an emerging threat, although T-Mobile isn't overly worried. T-Mobile is encroaching on cable companies' turf with its 5G home internet service, and Sievert noted that cable companies are generally not well liked by consumers.
T-Mobile announced in August that it was laying of 7% of its workforce as it adapts to a more competitive environment. This points to slower growth in the near term as the company fights tooth and nail for subscribers, and potentially lower margins. Given that growth will likely be slower than in the past, the dividend makes the stock a bit more attractive.
T-Mobile isn't a bad dividend stock, but one of the higher-yielding telecom stocks like AT&T may be a better bet for dividend investors.
