While investors may love their dividends, stocks with high yields often come with risks or very limited growth prospects.
But if one can find a stock with a decent yield that can grow a lot into the future, that's a ticket for superior payouts looking out five, 10, or 20 years or longer.
The best growth today is found in the tech sector, but most tech companies don't pay a lot in dividends. However, one winning company just announced a massive 35% increase in its payout following its Analyst Day, and analysts see even better things ahead.
T-Mobile is becoming a dividend growth monster
Following its Capital Markets Day on Wednesday, T-Mobile (TMUS -0.29%) announced a whopping 35% increase to its dividend. T-Mobile just introduced a dividend to shareholders last year for the first time, and started rather small compared with peers Verizon (VZ -0.10%) and AT&T (T -0.44%). T-Mobile's dividend yield amounted to 1.32% at today's price, but the big increase will bring that to 1.76%. That's still a far cry from Verizon's 6.2% yield or AT&T's 5.1%. However, as one can see, there is much more to a stock's return than its dividend yield:
TMUS 5 Year Total Returns (Daily) data by YCharts
T-Mobile has achieved a massive 150% gain over the past five years, including dividends. Meanwhile, AT&T has returned only 12% and Verizon shareholders have actually seen a 4% decline, even including dividends.
Moreover, T-Mobile has returned much more to shareholders recently in the form of share repurchases. T-Mobile's shareholder yield, which incorporates dividends and repurchases, totaled 6.11% over the past 12 months, almost as high as AT&T's 6.9% yield.
T-Mobile is best grower of the telecom bunch
The difference in shareholder returns is attributable to the fact that T-Mobile has outgrown its peers, largely because of its transformation as the industry transitioned to 5G. T-Mobile had formerly been a discount brand that thrived on lower prices, but with an inferior network. However, the acquisition of Sprint in 2020 along with some savvy spectrum purchases actually gave T-Mobile a network advantage as the industry flipped from 4G to 5G.
TMUS EPS Diluted (TTM) data by YCharts
And more growth lies ahead
T-Mobile also presented its Capital Markets Day on Wednesday, where it outlined its strategy for continued growth. These include:
- Maintaining its network leadership: It's doing so by investing in an AI-powered network, through a collaboration with Nvidia, Ericsson and Nokia.
- Continuing to take market share: It's focusing on places where it's still underpenetrated, including small and rural towns, business accounts, and roughly 30 of the top 100 metro markets where it's not already the leader.
- Increasing broadband growth: T-Mobile rolled out its 5G wireless broadband offering just a few years ago, but has already achieved 5.6 million broadband customers to date. By 2028, it sees that growth going to 12 million and then between 12 million and 15 million by 2030. That will be achieved both through wireless and fiber-to-the-home, which is a new initiative for the company.
- Collaborating on customer service with OpenAI: T-Mobile is partnering with OpenAI on IntentCX, which is an AI-powered predictive platform to better serve customers, anticipate their needs, and solve problems, all while reducing pressure on T-Mobile's customer service. The company hopes the initiative will lower churn even further while also lowering costs.
T-Mobile forecasts that these growth initiatives should lead to 5% service revenue growth, 7% EBITDA growth, and 8% free cash flow growth between 2023 and 2027.
That would lead the telecom industry, supporting continued dividend growth beyond even the recent increase.
Analysts raise their targets
In the wake of Analyst Day, analysts at Evercore raised their price target on T-Mobile to $220, up from $210. The analysts called T-Mobile the most attractive story in the cable and telco industries, raising the target based on a valuation based of 13.4 times 2027 free cash flow.
That's a premium to the rest of the sector, but T-Mobile's growth as well as the prospect of lower interest rates make its story much more appealing. In addition, T-Mobile said it plans to return another $50 billion to shareholders between 2023 and 2027, even while it reserves another $30 billion for acquisitions and other optionality. Even the newly raised dividend payout would only equate to about $4.1 billion per year in dividends. Therefore, that leaves ample room for more share repurchases and dividend growth well into the future.
