A company that can consistently pay more in dividends to its shareholders year after year is a great stock to own. Not only can you expect to receive a bigger dividend payment every year, but dividend growth stocks historically outperform the S&P 500.

One such stock that could prove to be a phenomenal dividend grower is T-Mobile (TMUS). Despite shares trading near their all-time high, they still look like a great value. The telecom stock sits on an increasingly strong cash position that can support its dividend growth for years to come.

A dividend that can grow 10% per year for the foreseeable future
When T-Mobile initiated its dividend last September, it included a note in the SEC filing indicating intentions to grow the amount paid per share by around 10% annually. So, despite the dividend yield of just 1.6%, investors’ yield on their original investment could grow substantially over time.

In comparison, T-Mobile’s telecom rivals have much higher yields, but their growth prospects are minimal. Verizon shares yield 6.5%, but investors can expect annual raises of about 5 cents per share, less than 2%. AT&T offers a similar yield, but its payment hasn’t budged since it spun off and sold WarnerMedia.

Importantly, T-Mobile has the financial position to support 10% annual dividend growth for the foreseeable future. Along with its dividend, it announced a total capital return authorization of $19 billion, of which $16 billion remains as of the end of 2023.

Only about $3 billion of that is going toward its dividend in 2024. That means T-Mobile could retire up to $13 billion in shares this year, which is about 7% of shares at its current price. That alone would get it more than halfway toward its annual 10% dividend increase without actually increasing the total amount spent on dividends.

Both AT&T and Verizon are busy servicing massive amounts of debt while staying committed to their big dividend payments, preventing them from committing to share repurchases. That’s a much less flexible position to be in than T-Mobile, and it could ultimately prevent them from exhibiting the same level of operational growth.

The financials support a growing dividend
The story at T-Mobile over the last few years has been its ability to leverage its spectrum position afforded by the merger with Sprint into a strong network. After investing heavily in building its network, it now has a fixed asset that’s throwing off billions in cash.

Last year, the company generated $13.6 billion in free cash flow. It expects that number to climb to about $16.6 billion this year. That’s thanks, in part, to lower capital expenditures, which it expects to come in at around $9 billion, at the bottom end of its $9 billion to $10 billion long-term forecast for annual spending. Still, strong revenue growth and improving operating margin are the key long-term drivers.

For reference, AT&T expects to generate between $17 billion and $18 billion in free cash flow this year. Verizon hasn’t provided guidance on free cash flow for this year. It generated $18.7 billion last year.

T-Mobile has consistently led the industry in net postpaid subscriber additions, including the highly valuable postpaid phone subscribers. It’s held average revenue per user steady while increasing revenue per account. That indicates more family plans, which are stickier. The result is slow and consistent growth in wireless service revenue.

That trend also shows up in its declining churn rate, which has come down considerably over the last few years. While T-Mobile has shown glimpses of its ability to produce better churn than AT&T and Verizon, its churn rate ended up higher than its rivals’ in the fourth quarter. If T-Mobile consistently produces better churn rates than its rivals (which it appears on course to do), it could result in an even wider gap between its net additions and AT&T or Verizon.

The price is right
T-Mobile shares currently trade for 11.5 times its 2024 free cash flow, based on management’s outlook. Granted, that’s a much higher multiple than AT&T (7 times free cash flow) and slightly higher than Verizon’s. But the premium is worth the price.

T-Mobile’s well-positioned to continue expanding its market share in the industry. Its relatively capital-light model gives it a lot more flexibility, and its healthier balance sheet means it can retire shares while supporting a strong dividend growth rate.

While T-Mobile doesn’t pay the massive dividend yields of AT&T or Verizon, it’s the best of the bunch when it comes to producing stronger financials year after year and returning excess cash to shareholders. For investors who prefer to see their dividends increase by more than a couple of pennies every year, T-Mobile is the stock to buy.

— Adam Levy

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Source: The Motley Fool