For investors who love stability and dividend growth, Warren Buffett's current portfolio is a great starting point. At the current moment, one particular name, which just initiated its first dividend, appears to be taking off.
The stock also just had a major technical overhang removed, and seems to be responding accordingly. Even more encouraging? One Wall Street analyst thinks the stock can move as much as 31% higher in the coming year.
The Un-Carrier can carry your portfolio in 2024
Buffett or one of his investing lieutenants, Todd Combs or Ted Wechsler, first bought T-Mobile (TMUS -0.06%) in the third quarter of 2020 for the Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) portfolio. That was just two quarters after T-Mobile successfully closed on the acquisition of fourth place telecom Sprint, forming the combined entity into a new industry powerhouse.
The Sprint acquisition not only allowed T-Mobile to expand its customer base and slash overhead costs, but it also brought with it important midband spectrum for 5G wireless. T-Mobile has since deployed that spectrum to take the lead in 5G coverage from its main rivals, AT&T and Verizon.
The results so far have been impressive. T-Mobile has gained market share with solid customer and postpaid phone net additions over the past few years. Moreover, T-Mobile has been able to use excess 5G capacity to deliver wireless broadband, an entirely new product line. The new offering has been a big hit with cost-conscious consumers, growing to over 4.2 million customers as of Sept. 30, despite having just been launched nationwide since April 2021.
A multiyear headwind was just removed
When the Sprint deal was closed, Sprint shareholder Softbank (SFTB.Y 1.75%) had to forfeit some of its shares as part of the deal, because of Sprint's underperformance between the deal announcement and its closing. However, Softbank would be able to recover those shares if T-Mobile's stock exceeded an average price of $150 for 45 days between the deal's close and the end of 2025.
While it's difficult to say for certain, it sure appears that $150 price acted as a ceiling on T-Mobile's stock since the merger. T-Mobile saw its share price hit that ceiling and immediately retreat in mid-2021, then again in late 2022. But T-Mobile's strong business performance couldn't be held down forever. The stock finally exceeded $150 on Nov. 30 of this year.
The stock hasn't looked back since. On Dec. 26, the 45-day volume-weighted average price time frame was exceeded, and Softbank got a Christmas gift in the form of 48.75 million T-Mobile shares.
As you can see, despite being about 4% dilutive to shareholders, the share issuance hasn't negatively affected T-Mobile's stock. In fact, the stock has continued to rise, indicating that the $150 ceiling perhaps was one of the roadblocks to a higher price. But now that the share issuance is in the rearview mirror, how high can the stock go?
T-Mobile is a cheap Warren Buffett stock for 2024. Image source: Getty Images.
T-Mobile is cheap
Fortunately for shareholders, T-Mobile initiated a share repurchase program in September 2022 and has already bought back more shares below $150 than it issued to Softbank. Since the start of the buyback plan through Oct. 20 of this year, T-Mobile has retired dome 98 million net shares, more than twice the amount just awarded to Softbank.
Assuming T-Mobile bought back a bit more since, the current share count after the Softbank issuance is about 1.2 billion. That brings T-Mobile's market cap to around $192 billion.
T-Mobile is just now finishing up its integration with Sprint and decommissioning towers, so those integration costs are coming down, leading to an inflection in free cash flow. Last quarter, free cash flow rocketed 94% higher to just over $4 billion, including $345 million of Sprint integration costs.
Assuming those integration costs go away, T-Mobile's current annualized run rate for free cash flow is now $17.4 billion. And given T-Mobile's 4% service growth rate last quarter and 6% postpaid service growth, that cash flow could very well exceed $18 billion next year.
That means the stock currently trades for less than 11 times 2024's likely free cash flow. Perhaps that's why 23 out of 25 Wall Street analysts rate the stock either a "Buy" or "Overweight."
The most bullish on the street is TD Cowen's Paul Gallant, who has a $210 price target on shares. That would mark 31% upside from today's $160 price.
I think that's a very fair value for the stock, given T-Mobile's lead in 5G, its ample repurchase plan, and its new dividend. And it's why T-Mobile, despite its being part of the "boring" telecom business, could very well exceed the market's upside in 2024.
