The wireless communications industry in America has multiple companies but only a small group of viable competitors. AT&T, Verizon Communications (VZ 1.17%), and T-Mobile US (TMUS -0.06%) control virtually the entire market. While these three competitors are relatively interchangeable in the eyes of most customers concerning the services they provide, their stocks have not performed the same over the past several years.
T-Mobile stock has obliterated its wireless competitors for the past decade, teaching investors valuable lessons about long-term investing. While Verizon has a seemingly dirt cheap price tag and a hefty dividend, here is why investors should focus on the big picture and own T-Mobile stock instead.
T-Mobile has far more control of its cash
Verizon doesn't have a problem making money. The company generates over $37 billion in cash profits from its daily operations yearly, more than twice as much as T-Mobile. The most significant difference between the two companies is where that cash goes.
For starters, Verizon is committed to its dividend. Management has raised the payout for 20 consecutive years, and at the current share price, it yields a juicy 6.7%. That's fine, but dividends represent cash leaving the business. Verizon spends $11 billion on its dividend (almost all of its net income over the past year), which is that much less money Verizon has to invest in its wireless network to provide an excellent product to customers.
Additionally, Verizon has taken on a lot of debt over the years. Currently sitting on $150 billion in long-term debt, Verizon has 3.7 times as much debt as its annual earnings before interest, taxes, depreciation, and amortization (EBITDA). That's more money going toward interest payments and less financial flexibility.
Compare that to T-Mobile. It also pays a dividend, but it spends only 37% of its net income on it. T-Mobile also has debt on its balance sheet. However, its debt-to-EBITDA ratio is just 2.7. Less of its cash flow going to the dividend and less spent on servicing its debt means it can invest more freely in providing its customers with the best wireless service and products.
Who has more business momentum?
Most people don't care about the brand of their wireless carrier. Their choice comes down to how good a company's wireless performance is and how little they can pay for it. There are high barriers to entry for new wireless competitors in the U.S., but consumers can easily switch between the big three providers.
That's where T-Mobile has shined in recent years. According to analytics company Opensignal, T-Mobile has offered the fastest 5G upload and download speeds in the United States in seven consecutive semiannual tests. T-Mobile also has the most 5G reach by a considerable margin. Verizon did win in some niche categories like video and gaming, but T-Mobile seemingly offers the leading user experience today.
That has translated into business results. T-Mobile has added a net of 3.1 million new postpaid wireless phone customers in 2023, compared to a net loss of 132,000 for Verizon. In other words, T-Mobile is eating Verizon's lunch.
A growing telecom versus a value trap
Verizon has a big dividend and only trades at a forward P/E of 8. Meanwhile, T-Mobile trades at a forward P/E of 17 and only yields 0.4% today. But Verizon's low price and high dividend haven't prevented T-Mobile from easily outperforming the stock.
That's because organic growth ultimately matters most, and T-Mobile is growing while Verizon's struggling.
TMUS Total Return Price data by YCharts.
Consensus long-term analyst estimates call for Verizon to grow its earnings by just 1% to 2% annually, versus over 20% for T-Mobile. Strong customer growth and lighter financial baggage have set the company up for robust earnings expansion.
T-Mobile is the obvious choice for any investors looking for total returns.
