Is T-Mobile still the best telecom stock?

T-Mobile (NASDAQ:TMS) showed it is on a path to further growth after reporting its second-quarter 2024 results on July 31. While it may be difficult to call it a “growth company” after these results, its growing net accounts and net customer additions point to continued expansion.

But after years of outperforming the competition, AT&T And Verizonit no longer delivers the highest returns in the industry. Does this mean it’s time for investors to turn away from T-Mobile stock?

T-Mobile’s results

Given its size, however, T-Mobile is not posting the numbers that would have made it a growth stock in the past. In the first half of the year, revenue of $39 billion was up just 2% compared to the same period in 2023.

Nevertheless, the company managed to reduce operating expenses by three percent during this period. This was enough to increase net profit to $5.3 billion in the first six months of the year, an increase of 27 percent over the previous year.

In addition, free cash flow for the first half of 2024 was $7.8 billion, up 48% for the year. An increase in operating cash flow and lower equipment spending more than offset lower proceeds from securitization transactions.

The improving financial situation enabled T-Mobile to pay an annual dividend of $2.60 per share starting in December last year. Although the dividend yield of 1.4% was S&P500 With an average dividend yield of 1.4%, the company lags behind Verizon and AT&T, which offer dividend yields of 6.5% and 5.7%, respectively.

The bad news for T-Mobile investors is that shortly after the dividend announcement, stock performance was similar to that of its main competitors. When dividends are included, AT&T is now the highest-yielding stock among its peers, outperforming only Verizon, which has been increasing its payout for 17 years but faces a crushing $149 billion in debt.

T-Mobile shares on the rise

Does this mean that investors should dump T-Mobile shares in favor of AT&T? After all, AT&T pays a dividend that attracts income-seeking investors, and its P/E ratio of 11 is well below T-Mobile’s earnings multiple of 24.

However, T-Mobile seems to stand out in terms of dividend-paying ability. The company’s free cash flow would be nearly $16 billion if it generates the same level of free cash flow over the next two quarters. This is only a small fraction of the $3 billion that T-Mobile must pay in dividends this year.

In addition, T-Mobile has $80 billion in debt, including $5.9 billion in short-term debt, allowing the company to pay off its short-term debt without having to raise cash or cut its dividend.

The story continues

This is unlikely to be the case for AT&T, which has $130 billion in total debt. About $5 billion of that debt is coming due this year, and it looks like the company will have dividend costs of about $8 billion for the year. AT&T can probably cover those costs, as the company expects free cash flow to be between $17 billion and $18 billion in 2024.

Still, AT&T remains under an even greater debt burden and has little ability to pay down its long-term debt quickly, leaving the company less prepared to respond to changes in the market without at least cutting its dividend.

Should investors sell T-Mobile shares?

Given T-Mobile’s financials, the company is likely to be the best performing telecom stock over the long term. As mentioned, Verizon has chronically underperformed its peers.

As for AT&T, a stock price recovery and high dividends have pushed the company’s annual earnings above those of T-Mobile. Unfortunately, AT&T’s massive debt load means it has relatively little ability to reduce its long-term debt, which in turn could limit the company’s ability to respond to changes in the market without cutting dividends.

Admittedly, T-Mobile stock’s growth could slow as it matures into a more mature stock, but if conditions remain challenging, the stock is best positioned to maintain its dividend and deliver the highest long-term returns.

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Will Healy does not own any stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

Is T-Mobile Still the Best Telecom Stock? was originally published by The Motley Fool