Why T-Mobile Stock
T-Mobile has been one of Berkshire Hathaway’s top performing stocks over the past three years. The telecom juggernaut has successfully executed on its plan to transform into one of the largest wireless carriers in the US after acquiring Sprint, giving it the scale and staying power to compete with titans like Verizon and AT&T.
Even though T-Mobile’s stock price hasn’t wildly outperformed the market since completing the Sprint merger, it is still up a healthy 80% during Berkshire’s ownership period. More importantly, it has established itself as a major force that is here to stay in the cutthroat US telecom industry.
T-Mobile may not garner as many headlines as some of Berkshire’s other stock picks, but it has been quietly powering gains as one of Buffett’s secret weapons. With strong fundamentals and an improving business outlook, T-Mobile stock remains a screaming buy right now for three compelling reasons.
Initiating a Dividend to Reward Shareholders T-Mobile recently started paying a modest dividend, a very positive development for shareholders. While the 0.43% yield won’t appeal to income investors, it signals that management is committed to rewarding shareholders and has confidence in its cash flow outlook.
Many studies have shown that stocks with growing dividends tend to significantly outperform non-dividend paying stocks over the long run. T-Mobile has plenty of room to grow its payout in the coming years as business fundamentals improve.
Buying Back Shares at an Accelerating Pace In addition to the new dividend, T-Mobile has been aggressively repurchasing its own shares. The company bought back $3 billion of its stock in 2021, nearly triple the amount from the prior year. Buybacks reduce share count and boost earnings per share, both positives for long term shareholders.
The recent repurchase activity shows that management views its stock as undervalued even after the huge run up over the past three years. T-Mobile seems intent on opportunistically acquiring more shares while they remain attractively priced.
Stabilizing Competitive Environment Boosting Cash Flow After a period intense competition, especially around the Sprint merger, Wall Street analysts expect the US wireless carrier industry to stabilize over the next few years. All three major players – Verizon, AT&T and T-Mobile – are now positioned as large national carriers with extensive network coverage.
This reduction in competitive intensity should translate into steadier cash flows and higher profitability for T-Mobile moving forward. The company expects to generate between $13.7 billion and $14.0 billion of free cash flow this year, which it can use to invest in growth initiatives and return capital to shareholders.
The Big Three are Ready to Coexist
After battling it out for subscriber growth and network coverage supremacy, the stage seems set for Verizon, AT&T and T-Mobile to peacefully coexist as technology leaders of comparable size and scope. T-Mobile cemented itself as one of the Big Three with the game changing Sprint acquisition.
The reduced likelihood of damaging price wars or massive capital spending sprees to one up each other is a huge positive for profit margins across the board. All three carriers are now poised to reap the benefits of rational competition rather than destructive competition.
T-Mobile Has Become a Free Cash Flow Machine T-Mobile expects to produce between $13.7 to $14 billion of free cash flow in 2022, representing a very healthy 10.5% free cash flow margin. And free cash flows should march steadily higher in the coming years as the company further penetrates the postpaid phone market and expands its fixed wireless broadband service.
The stock now trades at around 11 times forward earnings estimates, a reasonable valuation for a company projected to grow earnings at 20% per year over the next three years. With a rock solid balance sheet, excess cash building on the balance sheet, and ample free cash flows, T-Mobile has never been on more solid fundamental footing.
Shareholder Friendly Management Team T-Mobile’s management team, led by colorful CEO Mike Sievert, has laid out an ambitious goal to capture between 6 and 7 million broadband customers over the next five years. The company sees a huge market opportunity to disrupt the cozy cable broadband duopoly consisting of Comcast and Charter Communications.
And unlike the old days where every free dollar was pumped back into the business, management is now focused on balancing between growth investments, share repurchases and dividends.
Sievert comes from a financial planning and analysis background, so he fully understands the importance of profitability and returns on invested capital. This gives investors confidence that T-Mobile’s management team will be prudent stewards of shareholder capital in the years ahead.
Concise Company Profile
- Established wireless carrier with 108 million customers nationwide
- Successfully executed merger with Sprint in 2020
- Now firmly positioned as one of leading US telecom providers
- Major 5G network rollout boosting competitive positioning
- Strong balance sheet with investment grade credit rating
- Trading at reasonable 11 times forward earnings
- Management focused on shareholder friendly capital allocation
In Conclusion, T-Mobile Stock Remains a Screaming Buy While it failed to match the performance of Berkshire’s high flying tech stock investments, T-Mobile has still richly rewarded Buffett and his portfolio managers over the past three years. And with an improving profit outlook thanks to a more benign competitive backdrop, T-Mobile seems poised to continue delivering outsized returns for shareholders in the years ahead.
Between an attractive valuation, pristine balance sheet, diversified cash flows and shareholder friendly management team, T-Mobile has cemented itself as one of the most compelling telecom stocks on the market. Investors looking for a proven long term winner should follow Buffett’s lead and grab shares of T-Mobile before they take off again.