T-Mobile (TMUS 0.05%) will join its big telecom peers in paying a dividend to shareholders starting next quarter.
On Wednesday, the wireless carrier announced its new shareholder cash return program, authorizing management to return up to $19 billion to shareholders by the end of 2024. That's on top of the $14 billion it authorized last year, of which $2.2 billion remained as of the end of the second quarter. Unlike its previous authorization, this one includes a dividend, which will total approximately $3.75 billion over the next five quarters.
Now that T-Mobile is paying shareholders every quarter, with plans to raise the payment annually, should you add the stock to your portfolio?
A small, but fast-growing dividend
T-Mobile's dividend is relatively small compared to those of other telecom giants like AT&T (T -1.86%) and Verizon Communications (VZ -1.83%). At its current share count, T-Mobile's dividend would be about $0.63 per share each quarter. And at its current share price, that amounts to an annual dividend yield of less than 2%. By comparison, AT&T and Verizon both yield more than 7.5% right now.
T-Mobile plans to increase its per-share payout by about 10% per year for the foreseeable future, though. By comparison, Verizon has been increasing its dividend by about 2% per year. AT&T cut its dividend when it restructured last year, but prior to that, it was also raising its dividend by about 2% per year. So, investors more interested in dividend growth may see great appeal in T-Mobile.
Indeed, T-Mobile's decision to start paying a dividend has the potential to attract a new set of investors who had previously ignored it altogether. That could provide a slight boost to the stock simply from increased demand.
Don't buy T-Mobile for the dividend
T-Mobile may be paying a dividend, but that doesn't make the stock a buy. In fact, T-Mobile stock may be a buy despite its plans to pay a dividend.
T-Mobile previously favored a capital return program that relied exclusively on share repurchases. At its 2021 investor day, management indicated that it had no immediate plans to start paying a dividend.
Share buybacks are advantageous from a tax perspective. Shareholders have to pay taxes on their dividend payments every year. They don't have to pay taxes on share buybacks when they happen. Instead, share buybacks simply reduce the number of shares outstanding, theoretically increasing the value of each share. Those theoretical capital gains don't get taxed until an investor sells their shares, giving the shareholder more control over when they'll get that tax bill.
Share buybacks also offer support for the stock price. During periods when the shares offer exceptional value, management will buy shares. In part, declaring a dividend is an indication that management may think T-Mobile shares are nearing fair value.
That said, the vast majority of T-Mobile's new shareholder return program is still dedicated to buybacks. The company will buy back around $15.25 billion of shares by the end of 2024. That's on top of the $2.2 billion buyback authorization that it will likely finish using in the third quarter.
Importantly, T-Mobile has the free cash flow to support that level of capital return. CEO Mike Sievert says he expects $16 billion to $18 billion in free cash flow in 2024. That's on top of $13.2 billion to $13.6 billion in free cash flow this year. So, it plans to return about $21.2 billion over the next six quarters while generating about $25 billion of free cash flow.
By next year, T-Mobile will have sufficiently closed the free-cash-flow gap between itself and peers AT&T and Verizon. And as it improves its service-revenue-to-free-cash-flow ratio, it will be able to surpass the competition. Unlike those competitors, it doesn't have a massive debt load to pay down, so it'll have lots of cash to make acquisitions or return to shareholders.
Whether T-Mobile returns the excess cash it generates to shareholders through dividends or share repurchases, it's still returning a lot more than AT&T and Verizon. That makes it a great buy for investors interested in the wireless telecom space.