T-Mobile will start paying the dividend. Why is the stock going down?

Wireless service provider T-Mobile US will begin paying a dividend for the first time in the fourth quarter, joining rivals AT&T and Verizon Communications.

The stock market isn’t too happy about this news, though, as stock buybacks will continue to be T-Mobile’s primary way of returning cash to shareholders.

On Wednesday, T-Mobile (trading symbol: TMUS) said its board had authorized a $19 billion shareholder returns program to include $750 million in quarterly dividend payments and $15.25 billion in stock buybacks by the end of 2024. It will arrive That amounts to a payment of about 63 cents per share each quarter, based on T-Mobile’s stock count at the end of June.

At T-Mobile’s latest stock price of $135, it represents an annual dividend yield of about 1.9%. The company said it expects to increase its dividend per share by about 10% annually in the future.

The yield will pale in comparison to Verizon (VZ) and AT&T (T) stocks, at 7.5% and 7.6%, respectively.

T-Mobile stock gave up a slight gain in Wednesday afternoon trading after the news broke, to trade down 2.8% around 2:45 PM ET. the

Standard & Poor’s 500

down by 0.8%. Investors may prefer that T-Mobile focus shareholder returns on stock buybacks.

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T-Mobile management expects to return a total of $60 billion to shareholders by the end of 2025, thanks to financial benefits from its 2020 merger with Sprint. It has already spent about $12 billion on buybacks over the past year, buying back about 7% of its shares. T-Mobile’s previous shareholder return program, announced in September 2022, included up to $14 billion in buybacks. Its market capitalization is about $159 billion, which is greater than Verizon and AT&T.

In late July, T-Mobile hinted that a change in its dividend policy might be coming, via a subtle wording change in its quarterly filing with the Securities and Exchange Commission for the 10th quarter.

Adding dividends could expand the potential investor universe to those with yield-focused mandates, which increases demand for the stock. It also indicates that T-Mobile is growing quite a bit, and the struggling startup is no longer on the heels of Verizon and AT&T.

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But there are downsides: Dividends can be less tax efficient than buybacks, plus they make it more expensive for T-Mobile to use its stock as currency in a potential merger or acquisition.

“As long as the share price is undervalued, the company should use the excess cash to buy back shares,” Jonathan Chaplin, an analyst at New Street, wrote last month. “They create value for shareholders who hold their stock with each share they buy back for less than intrinsic value. They should only consider a dividend when they think the stock is approaching intrinsic value.

Wall Street analysts as a group certainly see the stock as undervalued: 90% of those covering T-Mobile stock have a Buy rating or equivalent, with an average price target of $175 — 30% above current levels. Shares are trading at 14.7 times expected earnings over the next year, versus an average of 31 times over the past five years.

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T-Mobile stock has lost 4% so far this year, against a return of 18% for the S&P 500. Verizon and AT&T have lost 9% and 17%, respectively, after their dividend year-to-date.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

(tags for translation) Communication services

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