When T Mobile (NASDAQ:TMUS) After completing its merger with Sprint in 2020, it effectively capped its stock price for the next few years.
As part of the merger agreement, Flexible banking (OTC: SFTB.Y) (OTC: SFTBF) lost 48.8 million T-Mobile shares to which it was entitled. However, the parties agreed that Softbank would recoup these shares if T-Mobile’s stock price remained above $150 for 45 days based on the volume-weighted average price before December 31, 2025.
After continually encountering resistance at $150 per share in 2023, T-Mobile shares held above the target price for most of December. Combined with a few days where the stock traded above $150 earlier in the year, this triggered the contract. T-Mobile immediately issued 48.8 million shares worth approximately $7.6 billion to Softbank.
While being forced to divest billions of dollars of stock may seem like a bad thing, the fact is that T-Mobile just eliminated one of the major factors keeping its stock price down. With the dilution event in the rearview mirror, T-Mobile’s stock price is free to rise. Here’s why investors should expect the stock to perform strongly in 2024.
T-Mobile buys back much more shares than it just issued
The $7.6 billion in stock T-Mobile just issued to Softbank is only a fraction of the amount T-Mobile is spending to buy back its stock. The company plans to return $60 billion in cash to shareholders from September 2022 to 2025.
Council authorized $14 billion investment share buyback program in fall 2022, and an additional $15.25 billion authorization was added in 2023. We could see an even larger authorization in 2024, as free cash flow improves and management seeks to reach the $60 billion mark.
Management repurchased 104.3 million shares for $14.8 billion through October 20. If it keeps up the pace, it will make up for the 48.8 million shares it just issued to Softbank within a few months.
So while stock dilution stings, it doesn’t hurt as much as if T-Mobile hadn’t already launched its massive capital return program.
Stock price should reflect future profits
While long-term investors have always factored in the potential for stock dilution if the stock price rises above $150, short-term traders may have put pressure on the stock price as They were trying to break through that price level. After all, when T-Mobile issued its shares to Softbank, it immediately reduced the value of everyone else’s shares, which might not hurt a long-term investor but could be bad news for a short-term trader. term.
With the dilution event having passed, T-Mobile’s stock price should now better reflect investors’ expectations for the company’s future. And the future of the company is bright.
T-Mobile is quickly transforming into a cash flow generating machine. It expects about $13.5 billion in free cash flow this year, and that figure is expected to rise to $16 billion to $18 billion in 2024. In 2021, management projected annual free cash flow of more than $18 billion. billion dollars by 2026, but this figure seems conservative in hindsight. .
This growth is fueled by strong market share gains in the wireless and home Internet market, where T-Mobile is using its excess 5G network capacity. The carrier left from Worst to First in Customer Loyalty, and the gross additions are always higher than those of its main competitors in the market. And while competitors have raised prices for existing customers, T-Mobile has mostly kept its prices the same. As a result, although revenue per user has remained stable for years, revenue per account is improving thanks to new value-added services and more demanding family plans.
As the company moves into maintenance mode on its 5G network and continues to add new customers, it should experience a strong margin increase, which will translate into strong bottom-line growth. Analysts currently expect earnings per share of $9.96 next year, up 39% year over year. The stock is trading at a multiple of 16 relative to those expectations. It also trades at about 10 times management’s free cash flow guidance for 2024. And while those prices represent a premium to its competitors in the wireless industry, T-Mobile is the only one in the group to grow at such a rapid rate.
As the stock price begins to more accurately reflect the company’s future earnings and cash flow, it is expected to rise from here on out.
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T-Mobile just eliminated the biggest factor keeping its stock price down. This could skyrocket in 2024. was originally published by The Motley Fool