Updated on May 11th, 2022 by Felix Martinez
Among companies in the wireless telecommunication services industry, two are extremely popular with dividend growth investors. AT&T Inc. (T) and Verizon Communications (VZ) are two of the most followed stocks by dividend growth investors.
Both stocks have high yields and long histories of growing dividends, especially AT&T, which was a Dividend Aristocrat.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with metrics that matter such as dividend yields and price-to-earnings ratios) by clicking the link below:
Both of these companies are fairly mature, which means that they can deploy a large percentage of their capital in the form of dividends. This is what income investors find so attractive about AT&T and Verizon.
The flip side of owning these companies is that investors might miss out on a fast-growing company in the same industry simply because it does not pay a dividend.
Over the last five years, shares of T-Mobile US, Inc. (TMUS) have returned 90.8% compared to the 55% gain for the S&P 500. For comparison purposes, Verizon’s stock has gained 12.1% while AT&T is down nearly 9.7% over this same period of time. Adding the dividend yields to the return of these two stocks doesn’t even begin to bridge the gap between their returns and that of T-Mobile.
Dividend growth investors interested in the company will likely want to know if and when T-Mobile might pay a dividend. This article will examine the company’s business model, growth prospects, and competitive advantages to see if a dividend is feasible in the near future.
Through its subsidiaries, T-Mobile provides wireless services for branded postpaid and prepaid, and wholesale customers. The company has operations in the U.S., Puerto Rico, and the U.S. Virgin Islands. T-Mobile offers voice, messaging, and data services.
The company’s product offerings include wireless devices, such as smartphones, tablets, and wearables, as well as accessories and wireline services.
T-Mobile was founded in 1994 and has a market capitalization of more than $158 billion today. The company produced revenue of $79 billion last year.
However, T-Mobile is on pace to generate more than $80 billion of revenue this year on account of its completed merger with Sprint in April of 2020. T-Mobile crossed over the 1.3 million wireless customer mark in the most recent quarter. As a result, T-Mobile is now the second-largest wireless network in the U.S., trailing just Verizon.
T-Mobile’s best prospect for future growth is its merger with Sprint. The company mentioned that its on track to complete Sprint customer network migration mid-year and decommissioning by end of year.
This has helped drive total postpaid accounts for the company. Leadership stated that merger synergies are already ahead of schedule, with the expectations for $5.2 to $5.4 billion in synergies this year.
T-Mobile was also showing strong growth rates prior to combing with Sprint. For example, the company has led the entire wireless telecommunications industry in net additions for several quarters in a row leading up to the merger with Sprint.
5G should also be a boost to T-Mobile’s business. The company’s 5G network is incredibly large, covering 225 million people and the geographic coverage is more than AT&T and Verizon combined. T-Mobile’s 5G network is available in all 50 states and Puerto Rico.
T-Mobile’s earnings-per-share have compounded at an annual rate of more than 32.2% from 2015 through 2021, which helps explain the stock’s impressive returns over this period of time. T-Mobile was already in high growth mode prior to merging with Sprint, but this transaction will only help fuel future gains as well.
One of the primary advantages that T-Mobile has is that is been adding new customers at a very high rate.
Source: Investor Presentation
In the frist quarter, T-Mobile had more than 348 thousands net additions. The company also had nearly 1.3 million postpaid net additions.
The increase in revenue per account is due to higher revenues from each individual user. The average revenue per user has climbed each quarter in 2021. T-Mobile generated $48.41 of revenue per user in the first quarter, a 2.3% increase from the same quarter a year ago.
T-Mobile’s churn ratio did increase 5 basis point year-over-year and 17 basis points sequentially but remains very low at 0.93%. The sequential increase in churn rate was attributed to higher switching activity due to fewer social distancing restrictions related to the COVID-19 pandemic compared to the first quarter.
The company’s most recent earnings results showed that it is leveraging all of its competitive advantages to its benefit. The company’s GAAP earnings-per-share increased 67.6% to $0.57 while revenue grew 1.1% to $15,128 million for the quarter.
Will T-Mobile Ever Pay A Dividend?
T-Mobile has already shown that it is a highly profitable company. The company has the other important ingredient needed to fund a dividend: positive cash flows.
T-Mobile’s cash from operating activities is quite strong. In the most recent quarter, cash from operating activities improved 56% to $1.75 billion. Sequentially, the improvement was even greater as net income was higher by a significant amount. Cash from operating activities is projected to be $5.1 billion to $6.1 billion for the last half of the year, a $500 million increase at the midpoint.
Though the company does invest a lot of capital into its business, $6.7 billion expected in the second half of 2020 alone, it does produce solid free cash flow as well.
Source: Investor Presentation
Free cash flow increased in the frist quarter compared to the previous year. T-Mobile raised its free cash flow estimate to $7.2 to $7.6 billion for the whole year of 2022, $100 million higher than previously expected at the midpoint.
Were it to pay a dividend, T-Mobile would need to use its free cash flow. Let’s assume that the company chose to allocate 50% of its free cash flow towards dividend payments. Using the company’s revised guidance, T-Mobile’s free cash flow totaled should be almost $7.4 billion in 2022. Therefore, T-Mobile could use $3.7 billion to pay each of its 1.24 billion shares outstanding an annual dividend of $2.98. Based on the current share price of ~$123, T-Mobile’s dividend yield would be 0.8%.
This is below the average dividend yield of 1.5% for the S&P 500 and pales in comparison to AT&T’s yield of 5.7% and Verizon’s yield of 5.3%.
Current shareholders of T-Mobile might rebel against the idea of a dividend, especially one that results in a very low yield when that capital could be better spent on growing the business.
There is a case to be made that T-Mobile could offer a higher dividend growth rate than its peers just based on its ability to grow earnings-per-share at a higher rate than either AT&T or Verizon. It is our belief that it isn’t likely that shareholders of the company’s peers would find that growth attractive enough to switch to the stock.
Due to the need to build out its business, we believe that T-Mobile is likely at least a few years away from offering its shareholders a dividend.
T-Mobile has left its competition far behind in terms of share price returns over the last five years. The company continues to set records for net additions that are superior to that of its peers. Add in the merger with Sprint and the most 5G coverage and T-Mobile’s future looks especially bright.
T-Mobile doesn’t pay a dividend today, but that could change in the future. Investors with a long-term view could find the stock an attractive total return option with the possibility of a dividend at some later date.
See the articles below for an analysis of whether other stocks that currently don’t pay dividends will one day pay a dividend: