Is T-Mobile Still the Best Telecom Stock to Own?

T-Mobile (TMUS 0.30%) showed that it is on a path to continued growth after it released its earnings on July 31 for the second quarter of 2024. While it might be hard to call it a “growth company” after seeing these results, its net growing and net customer additions point to continued expansion.

However, after years of outperforming rivals AT&T and Verizonno longer offers the highest returns in the industry. Does this mean it’s time for investors to turn on T-Mobile stock?

T-Mobile results

Of course, given T-Mobile’s size, it’s 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 was up just 2% compared to the same period in 2023.

However, it achieved a 3% reduction in operating expenses during that period. That was enough to boost net income to $5.3 billion in the first six months of the year, a 27 percent year-over-year increase.

Moreover, 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 expenses more than offset lower income from securitization transactions.

Its improving finances have allowed T-Mobile to offer an annual dividend of $2.60 per share since last December. Although its dividend yield of 1.4% closely matches the S&P 500 average, also at 1.4%, trails 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 it announced that dividend, the stock’s performance began to resemble that of its main competitors. As a result, when dividends are added, AT&T is now the highest-yielding stock among its peers. That puts T-Mobile ahead of only Verizon, which has maintained 17 years of pay increases but faces a crushing total debt of $149 billion.

TMUS Total Return Level data by YCharts

T-Mobile stock is moving forward

So does this mean investors should ditch T-Mobile stock for AT&T? After all, AT&T offers a dividend that appeals to income investors, and its P/E ratio of 11 is well below T-Mobile’s 24-earnings multiple.

However, T-Mobile seems to stand out in terms of dividend affordability. The company’s free cash flow would extrapolate to nearly $16 billion if it earns the same free cash flow over the next two quarters. That’s just a small fraction of the $3 billion T-Mobile is on track to pay out in dividends this year.

In addition, T-Mobile has $80 billion in total debt, including $5.9 billion in short-term debt. That way, it can afford to pay down its short-term debt without having to raise cash or cut its dividend.

That may not be the case for AT&T, whose total debt is $130 billion. About $5 billion of that debt is coming due this year, and it appears to be facing about $8 billion in dividend costs for the year. AT&T can likely cover those costs, as it expects to generate $17 billion to $18 billion in free cash flow in 2024.

However, this leaves AT&T with a higher debt burden as well as a reduced ability to reduce long-term debt at a rapid pace. Thus, it is less prepared to respond to changes in the market without at least reducing its dividend.

Should Investors Sell T-Mobile Stock?

Given T-Mobile’s financials, it’s likely to remain the best telecom stock for the long term. As noted, Verizon has chronically underperformed its peers.

As for AT&T, a stock recovery and high dividend have pushed its annual returns above T-Mobile’s. Unfortunately, a massive debt burden leaves AT&T with 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.

Of course, T-Mobile stock may slow as it evolves into a more mature stock. However, if conditions remain difficult, it is the stock best positioned to support its dividends and offer the highest long-term returns.