When T-Mobile (TMUS -0.06%) completed its merger with Sprint in 2020, it effectively put a cap on its stock price for the next few years.
As part of the merger agreement, Softbank (SFTB.Y 1.75%) (SFTBF -0.02%) forfeited 48.8 million shares of T-Mobile stock it was entitled to. However, the parties agreed Softbank would receive those shares back if T-Mobile's stock price stayed above $150 for 45 days on a volume-weighted average price basis before Dec. 31, 2025.
After continually running into resistance at $150 per share in 2023, T-Mobile shares sat above the target price for most of December. Combined with a few days where the stock traded above $150 earlier in the year, it triggered the contract. T-Mobile immediately issued 48.8 million shares worth about $7.6 billion to Softbank.
While being forced to hand over billions of dollars' worth of shares may sound like a bad thing, the fact is T-Mobile just eliminated one of the biggest factors holding its stock price down. With the dilution event in the rearview mirror, T-Mobile's stock price is free to run higher. Here's why investors should expect a strong performance from the stock in 2024.
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T-Mobile is buying back way more shares than it just issued
The $7.6 billion in shares T-Mobile just issued to Softbank is a fraction of the amount T-Mobile is spending to buy back its shares. The company plans to return $60 billion of cash to shareholders from September 2022 through 2025.
The board authorized a $14 billion share repurchase program in the fall of 2022, and it added another $15.25 billion in authorization in 2023. We could see an even bigger authorization in 2024, as free cash flow improves and management looks to hit its $60 billion mark.
Management has bought back 104.3 million shares for $14.8 billion through Oct. 20. If it keeps up the pace, it'll offset the 48.8 million shares it just issued to Softbank within a matter of months.
So while the share dilution stings, it doesn't hurt nearly as much as it might if T-Mobile hadn't already started its massive capital return program.
The share price should reflect future earnings
While long-term investors had always factored in the potential for share dilution if the stock price moved above $150, short-term traders may have put pressure on the stock price as it attempted to break through that price point. After all, when T-Mobile issued its shares to Softbank, it immediately reduced the value of everyone else's shares, which might not hurt a long-term investor but could be bad news for a short-term trader.
With the dilution event out of the way, T-Mobile's share price should now offer a better reflection of investors' expectations for the company's future. And the company's future is bright.
T-Mobile is quickly turning into a cash-flow-generating machine. It expects about $13.5 billion in free cash flow this year, and that number should reach $16 billion to $18 billion in 2024. In 2021, management guided for more than $18 billion in annual free cash flow by 2026, but that number's looking conservative in hindsight.
Fueling that growth is strong share gains in the wireless and home internet market, where T-Mobile uses its excess 5G network capacity. The carrier went from worst to first in customer retention, and it's still seeing gross additions top its major rivals in the market. And while competitors have raised prices on existing customers, T-Mobile has mostly kept its pricing the same. As a result, while revenue per user has been consistently flat for years, it's seeing improved revenue per account with new value-added services and stickier family plans.
As the company moves into maintenance mode on its 5G network build out and continues to add more customers, it should see strong margin expansion, resulting in great bottom-line growth. Analysts currently expect it to produce $9.96 in earnings per share next year, up 39% year over year. The stock trades at a multiple of 16 on those expectations. It's also trading at around 10 times management's outlook for 2024 free cash flow. And while those prices are a premium to its rivals in wireless, T-Mobile is the only one of the bunch growing at such a strong pace.
As the stock price begins to more accurately reflect the future earnings and cash flow of the company, it should move higher from here.
