Unlocking the Power of Telecom Stocks
When it comes to investing, telecom stocks often fly under the radar. However, these companies offer a unique combination of predictable cash flow and attractive dividend yields, making them an attractive option for income-focused investors.
A Recipe for Success
Subscription-based revenue and long-term contracts provide telecom companies with a steady stream of income, allowing them to generate significant free cash flow. This, in turn, enables them to return a substantial portion of their earnings to shareholders in the form of dividends and share repurchases.
Telecom Giants Lead the Way
Verizon Communications, for instance, has paid out an impressive $11.2 billion to shareholders over the past 12 months, boasting a dividend yield of 6.6%. AT&T, meanwhile, has focused on streamlining its operations and now offers a 5% dividend yield, paying out $8.2 billion to shareholders over the past year.
T-Mobile: The Dark Horse
However, one telecom giant has returned even more capital to shareholders: T-Mobile. With a total of $11.8 billion returned over the past year, T-Mobile’s capital-return program is primarily focused on share repurchases, which could prove even more beneficial to shareholders than traditional dividends. The company’s management has recently announced a 35% increase to its dividend payout, bringing its yield to a healthy 1.6%.
Understanding Capital Returns
There are two primary ways for companies to return excess cash to shareholders: dividends and share repurchases. Dividends provide a direct cash payment to shareholders, while share repurchases indirectly return value by reducing the number of outstanding shares and increasing each shareholder’s stake in the business.
The Benefits of Share Repurchases
Share repurchases can be a more effective way to create shareholder value than dividends, as they incur a lower tax drag. Additionally, by reducing the share count, T-Mobile sets itself up for potential future dividend growth.
A Commitment to Shareholder Value
T-Mobile’s management expects to generate an additional $80 billion in capacity for investments and shareholder returns through 2027, with a significant portion earmarked for share repurchases. This commitment to returning cash to shareholders, combined with steady dividend growth, makes T-Mobile an attractive option for income-focused investors.
Advantages Over Competitors
T-Mobile’s ability to generate and return cash to shareholders is bolstered by its lower debt levels and advantageous spectrum portfolio. Additionally, its focus on leasing fixed-line assets saves the company money on capital expenditures.
A Premium Worth Paying
While T-Mobile’s stock may trade at a premium to its competitors, its expected 7% annual EBITDA growth rate and improving margin on service revenue support a higher multiple. With its massive share-repurchase program and commitment to shareholder value, T-Mobile looks like a solid investment opportunity.
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