2023-10-08 09:00:15 ET
Summary
- Over the past ten years, TMUS has had an extraordinary run, surpassing both its competitors and the market by delivering returns that were at least double.
- Through strategic M&A, TMUS achieved a 22.5% annualized top-line growth and increased its operating profit over 11 times since 2013, all while improving margins.
- TMUS, with lower leverage than competitors, is poised for market share growth, expecting annualized 19% EPS growth over the next 4 years.
- The newly announced 1.8% dividend yield and focus on stock buybacks suggest strong returns ahead, with my projection of delivering 13.8% annualized total return.
Investment Thesis
Recently, telecommunications companies have been feeling the heat due to rising interest rates, especially with short-term CDs offering a tempting 5% yield to investors. Many investors, especially those relying on these investments for their day-to-day expenses, tend to lean towards options that promise good yields over time, even if it means sacrificing potential capital gains.
However, if you're someone who values the growth of your investment, T-Mobile US ( TMUS ) might just be the right fit for you.
TMUS has consistently outperformed its competitors such as Verizon ( VZ ), AT&T ( T ), and even the S&P 500 Index ( SPY ) with remarkable precision over the past decade.
In fact, TMUS has been on a winning streak, delivering an impressive 427% performance over the last ten years. What's more, with its significantly lower leverage, I believe TMUS will continue to outshine both the market and its competitors in the foreseeable future.
While TMUS has typically focused on rewarding shareholders through buybacks, a recent move has caught investors' attention: the company's decision to authorize its first dividend, set to be paid out in Q4 2023. This move has pushed TMUS's yield to 1.8% based on today's stock price.
These developments are expected to make TMUS even more attractive, appealing not only to investors seeking steady income but also to those keen on consistent dividend growth.
Impressive Growth and Anticipating Additional Market Share Gains
T-Mobile US, entered the US market through a series of mergers and acquisitions. In 2001, VoiceStream Wireless Corporation, a regional carrier, was acquired by Deutsche Telekom ( DTEGY ), a German telecommunications company.
VoiceStream was later rebranded as "T-Mobile US". The significant move came in 2011 when AT&T attempted to acquire TMUS for $39 billion. However, the US government opposed the deal due to antitrust concerns, and the acquisition was abandoned.
As a result, AT&T had to pay TMUS a breakup fee and provide them with valuable spectrum licenses, which bolstered T-Mobile's network capabilities.
In 2013, TMUS merged with MetroPCS Communications, Inc., a smaller regional carrier, strengthening its position in the prepaid wireless market. This merger expanded TMUS's customer base and network coverage.
TMUS's market presence continued to grow, and in April 2020, TMUS completed its merger with Sprint Corporation, another major US wireless carrier. This merger was a significant milestone, resulting in the formation of the "New T-Mobile," making TMUS a more substantial competitor in the US.
These strategic moves and acquisitions allowed TMUS to establish itself as one of the major players in the US wireless industry.
Thanks to the company's active involvement in M&A over the last decade, they've seen substantial growth. Their revenue surged at an annual rate of 22.5% or a 12.5% CAGR if you will, over the past ten years.
What makes this story even more intriguing is the remarkable increase in their operating income. During this period, TMUS managed to boost its operating income by more than 11.3x. This translated into a remarkable rise in their operating margin, climbing from 4.8% in 2013 to an impressive 16.7% in 2022.
Now, that's something we do not see every day.
Historical Financials (Author Graph (Data SA))
While TMUS does still have a slightly lower operating margin compared to major players like Verizon with 23% and AT&T with around 24% as of the end of 2022, it's crucial to note that TMUS carries significantly less debt than its main rivals. Currently, TMUS has a net long-term debt of $67.5 billion, in sharp contrast to the heavily leveraged Verizon at $148 billion and AT&T at $132 billion.
Looking at the Debt to Equity ratio, TMUS clearly holds the upper hand over its peers, averaging 24% lower. This substantial advantage gives TMUS the opportunity to grow much faster in the future compared to its competitors.
Debt to Equity Ratio (Seeking Alpha)
The current buzz in the wireless industry revolves around 5G technology. However, despite the hype, this advancement hasn't yet translated into significant financial growth for major players. TMUS stands in a unique position, especially after its acquisition of Sprint, with analysts projecting $7.5 billion in merger synergies.
To maintain its edge, TMUS has been strategic, purchasing 5G airwaves from Comcast ( CMCSA ), a deal valued between $1.2 billion to $3.3 billion, expected to close in 2028. Until then, TMUS will lease access from Comcast, ensuring a smooth transition.
One looming concern is the intensifying competition in the wireless market, as cable TV companies are bundling wireless services with their broadband products. Despite these challenges, TMUS holds a significant advantage in the 5G landscape, owning more 5G radio spectrum than AT&T or Verizon, a strategic move made possible by the Sprint acquisition. This advantage positions TMUS well as 5G wireless services are rolled out.
While 5G-related smartphone revenue has disappointed across the industry, TMUS has devised alternative strategies. Leveraging its 5G spectrum edge, TMUS aims to attract both business customers and consumers in rural areas, a market segment often overlooked.
In 2022 alone , TMUS added 2 million 5G fixed broadband subscribers, a substantial increase from the previous year. The company's ambitious goal is to sign up 7 to 8 million 5G fixed broadband subscribers by 2025, making services available to approximately 40 million US households.
On the enterprise front, private 5G network services are expected to usher in new business applications. The future of 5G wireless technology lies in various sectors such as the industrial Internet of Things, remote healthcare, drones and robotics, autonomous driving, and smart factories.
Analysts predict TMUS will lead the industry, expecting in Q3 earnings 806,000 net postpaid phone additions, driven by low churn rates. In contrast, while TMUS experiences growth and increased cash flow, competitors like Verizon and AT&T struggle to maintain dividends and satisfy shareholders.
At the same time, TMUS has made strategic decisions to navigate this evolving landscape, including workforce adjustments, eliminating approximately 5,000 positions, which accounts for just under 7% of the company's workforce, ensuring agility and adaptability in this competitive market.
Return to Shareholders
As most of us are aware, TMUS currently doesn't offer dividends, which could be a factor leading many individuals to lean toward Verizon or AT&T as reliable sources of income, especially in their retirement years.
While this is a valid reason to consider competitors with high single-digit yields, TMUS distinguishes itself through its impressive stock appreciation.
Despite of that, TMUS recently made an exciting announcement : starting in Q4 2023, the company will initiate dividend payments, aligning itself with its competitors.
Though TMUS has indicated that it will primarily continue returning value to shareholders through buybacks, authorizing an additional $15.25 billion in buybacks, they've also chosen to allocate $750 million for dividends. This translates to approximately $0.63 per share on a quarterly basis.
At today's TMUS stock price of $139, this equates to a yield of 1.8%, which, admittedly, pales in comparison to Verizon's 8.6% and AT&T's 7.7%. However, there's an expectation of robust dividend growth in the upcoming years, accompanied by an increase in EPS.
I anticipate an annualized dividend growth rate in the range of 10% to 15%, with the company aiming for a payout ratio of approximately 30% to 40% of its EPS.
Dividend Projection (Seeking Alpha)
Valuation
Speaking of valuation , TMUS is currently trading at a premium compared to its peers. For instance, its Forward PE Ratio of 18.26x its FY24 earnings is significantly higher than Verizon's 6.58x and AT&T's 5.95x for the same period.
This variance is likely why Seeking Alpha has assigned TMUS a Valuation Grade of C-, while Verizon and AT&T both boast a rating of B.
However, it's essential not to solely rely on peer comparisons. Interestingly, TMUS is presently trading at a discount when compared to its 5-year averages.
It's crucial to factor in the substantial leverage of telecommunication companies, which will continue to impact their financials especially in high rate environment. This heavy leverage will likely increase the cost of capital, making them less appealing, especially when short-term CDs are offering over 5% yield.
Considering these factors, it's reasonable to expect TMUS to trade at more balanced levels in the next 12 months, provided interest rates remain stable. Even if rates do decrease in late 2024, we shouldn't anticipate a return to the low-rate environment experienced between 2012 and 2022.
Valuation Grade (Seeking Alpha)
Despite of that, analysts are anticipating substantial growth from TMUS over the next four years. This growth is expected to notably reduce the Forward PE ratio, potentially bringing it down to 7.14x its FY27 earnings.
Despite my optimism about TMUS's future, I hold a slightly more cautious view than the analysts. I anticipate that TMUS might achieve EPS growth at the lower end of the spectrum, especially given the challenges posed by the current high-rate environment, compared to what we've become accustomed to in the past.
Expected EPS Growth (Seeking Alpha)
I anticipate TMUS to achieve an average annualized EPS growth of 19% over the next four years, primarily fueled by M&A activity. If this scenario unfolds, it could lead to FY27 earnings reaching $15 per share. In my projection, today's Forward PE ratio of 9.26x FY27 earnings contrasts with the analysts' expectation of 7.14x FY27 earnings.
Additionally, considering this growth trajectory, the company might potentially trade at around $206 by the end of 2027. This implies an impressive annualized rate of return of 12%, or 13.8% including the newly announced dividend.
Fiscal Year | 2023 | 2024 | 2025 | 2026 | 2027 |
EPS | $7.61 | $9.64 | $11.44 | $13.09 | $15.00 |
EPS Growth | 5.5% | 26.7% | 18.7% | 14.4% | 14.6% |
Forward PE | 18.3 | 16.0 | 15.0 | 14.8 | 13.7 |
Stock Price | $ 139 | $ 154 | $ 172 | $ 193 | $ 206 |
Game Plan and Conclusion
Over the last decade, TMUS has consistently outperformed its peers, not only in total returns but also in business growth. Its advantage of having lower leverage positions it well for continued dominance over the next ten years. This is expected to be driven by further M&A activities and the accelerating momentum in 5G technology, an area where major wireless carriers have yet to see substantial results.
If my anticipation of an average 19% annualized EPS growth comes to fruition, TMUS's stock price could reach $206 by the end of 2027.
Currently, I don't hold any direct positions in TMUS. Instead, I have significant investments in Deutsche Telekom, comprising 5.3% of my total dividend growth portfolio. Considering DT owns around 51% of TMUS, I have an exposure of 2.5% of my portfolio to the company.
I prefer holding TMUS through DT because DT offers higher dividend yield, better tax advantage for European investors and provides greater geographical diversification.
For further details see:
T-Mobile US: Expect The Market Dominance To Continue