Warren Buffett has invested in all three major U.S. wireless carriers, but Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) currently owns just one.
T-Mobile (TMUS -0.06%) has outlasted its peers AT&T (T 1.02%) and Verizon (VZ 1.17%) in Buffett's portfolio. Berkshire bought AT&T in mid-2015, only to turn around and sell it in the next two quarters. It bought Verizon stock a couple of times: once in early 2014, and it completely sold out by the end of 2016. It purchased Verizon stock again at the end of 2020 and early 2021, which the company disposed of about a year later.
But T-Mobile has been a small part of Berkshire's portfolio since mid-2020. And it's still there three years later. There's good reason for Buffett to like T-Mobile, and it's not too late to jump on board and buy shares yourself.
What makes T-Mobile a Buffett stock?
A lot of Berkshire holdings traditionally skew toward big dividend payers, so it would seem like AT&T and Verizon are more up Buffett's alley. T-Mobile has yet to send its first dividend check to shareholders (although it's coming).
But T-Mobile is quickly becoming a cash flow machine. That's something it outlined when it announced its merger with Sprint back in 2018. It received approval for the merger in 2020, and that's when Buffett started buying shares.
T-Mobile is certainly executing its big cash-flow promises. It expects about $18 billion in free cash flow next year. And it's returning most of it to shareholders, primarily through stock repurchases.
Another reason Buffett may prefer T-Mobile over its competition is that it's building a very strong moat.
For one, the T-Mobile brand has gotten significantly stronger over the last half-decade. Subscriber churn fell to the lowest in the industry last quarter, indicating consumers see strong value in the T-Mobile brand.
Moreover, the company has a significant spectrum advantage following the Sprint merger, which has made it difficult and costly for the competition to catch up with its 5G network build-out. In other words, T-Mobile has the best network in the country, and that's probably not going to change soon.
Interestingly, though, when Berkshire added T-Mobile to its portfolio in 2020, it didn't present the best value by usual metrics. It was far more expensive than AT&T or Verizon, no matter which way you looked at it. But Buffett's always looking for great companies at a reasonable price, not necessarily stocks trading at the lowest valuation.
T-Mobile's valuation today looks much more reasonable as it's grown into a much more cash-generating and profitable business.
It's not too late to add shares to your own portfolio
Shares of T-Mobile are still appealing. In fact, Berkshire's position might not have kept up with the S&P 500 since its initial purchase. Shares are trading just above the level they traded at the end of 2020 when Berkshire made its second purchase.
T-Mobile continues to execute, consistently winning more net subscriber additions than its two biggest rivals. With the potential growth from its internet service and its sustainable 5G lead, the company looks like the long-term leader in wireless. It's also finding new growth avenues, such as home internet service.
Its new capital return program should provide significant support for the stock at this level, while its operations should power the price higher over time. And management is willing to pay a small dividend for shareholders to wait for the stock price to catch up to its value.
T-Mobile appears to be trading below its intrinsic value as a company, and Warren Buffett agrees. Investors looking to invest in wireless telecom stocks should add it to their portfolio.
