Should Investors Cheer a Big T-Mobile Buyback Plan?

At a recent investor conference in Barcelona, T-Mobile US (NASDAQ: TMUS) CFO Braxton Carter said that the company is likely to begin a "significant" buyback program in December, pending board approval. T-Mobile had recently been the subject of merger and acquisition speculation, specifically with Sprint, the fourth-largest mobile carrier in the country. Those merger talks fell through earlier this month, dashing the hopes not only of Sprint, which was looking to join up with No. 3 T-Mobile, but likely also AT&T, Verizon Communications (No. 2 and No. 1), and anyone else hoping for a consolidation of the telecom industry.

Of course, T-Mobile had been negotiating from a position of strength. As I previously wrote, T-Mobile's low-priced offerings, solid balance sheet, and renegade attitude have allowed it to take share in the space, forcing premium-priced telecom companies to follow it into unlimited plans. But the two parties could not come to terms, so T-Mobile will continue on its own to do what it's already been doing: taking share and taking names.

Now what?

With M&A off the table for now, T-Mobile now has three options for how to use its cash flow: reinvest in the business, pay down debt, or return money to shareholders.

Looking at business reinvestment, T-Mobile is coming off of a rather substantial investment cycle. It bought 600 Mhz spectrum in an auction earlier this year, with which it hopes to launch a nationwide 5G network by 2020. The company is also rolling out 3,000 more retail locations this year as it looks to penetrate the third of the country in which it has not historically competed. In other words, T-Mobile shouldn't need to spend a huge amount on capital expenditures next year.

Buyback, dividend, or pay off debt?

Paying down the company's $31 billion in debt would be an option, however, debt is a big part of every mobile carrier's capital structure, as revenue is generally regarded as "safe" and recurring. Since we are living in an age of record-low interest rates, not using cheap debt could even be frowned upon. Since T-Mobile is underlevered and outperforming peers, there doesn't seem to be reason to pay down debt here.

As Carter said:

That leaves buybacks or dividends. T-Mobile's large competitors, AT&T and Verizon, both offer high-yielding dividends, with payout ratios of 66% at AT&T and 60% at Verizon (on an adjusted basis). T-Mobile has never paid a dividend, and management seems to think that is one of the company's competitive advantages. In fact, management recently said it regarded its competitors' dividends as a form of burdensome unsecured debt.

During the Barcelona conference, Carter said, "... unless you did the substantial dividend, you're really not going to attract that new type of yield investor that a dividend-type company would attract. So we're really focused on the buyback."

As one of my business school professors once said, dividends are like getting married, whereas buybacks are like hooking up. Once you start paying dividends, it becomes very hard to cut them, and there's pressure to keep increasing them. Buybacks, on the other hand, can be deployed when management thinks the stock is attractive.

But is it cheap?

Warren Buffett once said that share repurchases only make sense if one's stock is undervalued. Since T-Mobile management believes it could launch a "significant" buyback, it could mean that it also has confidence in its stock.

Of course, the stock doesn't exactly scream cheap at 24 times earnings. Historically, there are many accounts of management teams buying back stock when times were good and the price was high, only to run out of cash when times got bad.

Of course, it's clear that T-Mobile has very skilled management, so I am willing to bet that growth in the years ahead would justify a buyback today. Carter said buybacks could commence as early as December, so keep your eyes on what the board decides.

10 stocks we like better than T-Mobile USWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and T-Mobile US wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 6, 2017

Billy Duberstein owns shares of AT&T. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.