T-Mobile (NASDAQ: TMUS) showed it was on a path to continued growth after releasing its earnings on July 31 for the second quarter of 2024. Although it might be hard to call it a "growth company" after seeing those results, its growing net account and net customer additions point to continued expansion.
However, after years of outperforming rivals AT&T and Verizon, it no longer delivers the highest returns in the industry. Does that mean it is time for investors to turn on T-Mobile stock?
T-Mobile's results
Admittedly, given the size of T-Mobile, it is not posting the numbers that might have made it a growth stock in the past. For the first half of the year, revenue of $39 billion rose by only 2% compared with the same period in 2023.
Still, it achieved a 3% reduction in operating expenses during that time. That was enough to boost net income to $5.3 billion in the first six months of the year, a 27% yearly increase.
Moreover, free cash flow for the first half of 2024 was $7.8 billion, an increase of 48% for the year. An increase in operating cash flow and lower equipment spending more than offset the lessened proceeds from securitization transactions.
Its improving finances allowed T-Mobile to offer an annual dividend of $2.60 per share beginning last December. Although its 1.4% dividend yield closely matches the S&P 500 average, also 1.4%, it lags Verizon and AT&T, which offer dividend yields of 6.5% and 5.7%, respectively.
The bad news for T-Mobile investors is that soon after it announced that dividend, the stock performance began to resemble that of its main competitors. Consequently, when one adds dividends, AT&T is now the highest-returning stock among its peers. This leaves T-Mobile outperforming only Verizon, which has maintained 17 years of payout hikes but faces a crushing $149 billion in total debt.
TMUS Total Return Level data by YCharts
T-Mobile stock moving forward
So does this mean investors should drop T-Mobile stock in favor of AT&T? After all, AT&T offers a dividend that draws income investors, and its P/E ratio of 11 is far below T-Mobile's 24 earnings multiple.
However, T-Mobile appears to stand out in terms of dividend affordability. The company's free cash flow would extrapolate to almost $16 billion if it earns the same free cash flow over the next two quarters. This is only a small fraction of the $3 billion T-Mobile is on track to pay in dividend costs this year.
Additionally, T-Mobile holds $80 billion in total debt, including $5.9 billion in short-term debt. Thus, it can afford to pay down its near-term debt without having to raise cash or reduce the dividend.
This may not be the case with AT&T, whose total debt is $130 billion. Around $5 billion of that debt matures this year, and it appears to face about $8 billion in dividend costs for the year. Presumably, AT&T can cover those costs, as it expects to generate between $17 billion and $18 billion in free cash flow in 2024.
Nonetheless, that leaves AT&T with a heavier debt burden, as well as little ability to reduce long-term debt at a rapid pace. Thus, it is less prepared to respond to changes in the marketplace without slashing its dividend at the very least.
Should investors sell T-Mobile stock?
Considering T-Mobile's financials, it is likely to remain the best-performing telecom stock long term. As mentioned, Verizon has chronically underperformed its peers.
As for AT&T, a stock recovery and high dividend have taken its yearly returns above T-Mobile's. Unfortunately, a massive debt burden leaves AT&T with relatively little ability to reduce its long-term debt, which could in turn limit the company's ability to respond to changes in the marketplace without a dividend cut.
Admittedly, T-Mobile stock may slow as it evolves into a more mature stock. However, if conditions remain challenging, it is the stock best positioned to sustain its dividend and deliver the highest long-term returns.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
