when T-mobile (NASDAQ:TMUS) completed its merger with Sprint in 2020, effectively capping its stock price for the next few years.
As part of the merger agreement, Softbank (OTC:SFTB.Y) (OTC: SFTBF) 48.8 million T-Mobile shares to which he had rights were confiscated. However, the parties agreed that if T-Mobile’s stock price exceeds $150 for 45 days on a volume-weighted average price basis by December 31, 2025, SoftBank will return those shares.
T-Mobile stock hovered above its price target for much of December after consistently encountering resistance at $150 per share in 2023. That, combined with several days earlier this year when the stock traded above $150, helped spark the deal. T-Mobile immediately issued 48.8 million shares worth approximately $7.6 billion to SoftBank.
Being forced to give up billions of dollars worth of stock might sound bad, but the truth is that T-Mobile just removed one of the biggest drivers of its stock price. With the dilution event in the rearview mirror, T-Mobile’s stock price is free to rise. Here’s why investors should expect strong performance from the stock in 2024.
T-Mobile is buying back far more shares than it just issued.
The $7.6 billion in stock that T-Mobile just issued to SoftBank is only a fraction of the amount T-Mobile is spending on stock buybacks. The company plans to return $60 billion in cash to shareholders between September 2022 and 2025.
The Board of Directors authorized a $14 billion share repurchase program in fall 2022, with an additional $15.25 billion authorized in 2023. Larger approvals could come in 2024 as free cash flow improves and management looks set to reach the $60 billion mark. .
By October 20, management had repurchased 104.3 million shares for $14.8 billion. If it maintains this pace, it will offset the 48.8 million shares it just issued to SoftBank within a few months.
So while the stock dilution is painful, it’s not as painful as it would have been if T-Mobile had not yet embarked on a large capital return program.
Stock prices need to reflect future earnings
Long-term investors have always priced in the potential for dilution if the stock price rises above $150, but short-term traders may have put pressure on the stock in an attempt to break through that price point. After all, when T-Mobile issued stock to Softbank, it immediately drove down the value of everyone else’s stock, so while it may not hurt long-term investors, it’s bad news for short-term traders. It may become.
With the dilution case resolved, T-Mobile’s stock price should better reflect investors’ expectations for the company’s future. And the company’s future is bright.
T-Mobile is rapidly turning into a cash flow machine. It expects free cash flow to be about $13.5 billion this year, and that number should reach $16 billion to $18 billion in 2024. In 2021, management said it was aiming to generate more than $18 billion in annual free cash flow by 2026, but in retrospect that number seems conservative.
Driving this growth is T-Mobile’s significant share gains in the wireless and home internet market, where it is leveraging excess 5G network capacity. The company has gone from worst to first in customer retention, but its total growth is still higher than its main rivals in the market. Additionally, while competitors have raised prices for existing customers, T-Mobile has kept its prices roughly the same. As a result, revenue per user has remained consistently flat over the years, but revenue per account has improved due to new value-added services and more robust family plans.
As the company moves into maintenance mode for building out its 5G network and continues to add more customers, margins should expand significantly and revenue should increase significantly. Analysts currently expect earnings per share to increase 39% year over year to $9.96 next year. Based on these expectations, the stock is trading at a multiple of 16 times. It also trades at about 10 times management’s 2024 free cash flow forecast. Although these prices are steep compared to wireless rivals, his T-Mobile is the only company growing at such a fast pace.
The stock price should rise from here as it starts to more accurately reflect the company’s future earnings and cash flow.
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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends his T-Mobile US. The Motley Fool has a disclosure policy.
T-Mobile just removed the biggest drag on its stock price. It is likely to skyrocket in 2024. Originally published by The Motley Fool.