T-Mobile Is Working on a Massive Capital Return Program

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T-Mobile (NASDAQ: TMUS) announced a $1.5 billion share repurchase authorization back in December. By the time it reported its fourth-quarter earnings at the beginning of February, it had already gone through more than half of that.

Capital return is something T-Mobile's management has stressed will be a priority for the company's ballooning cash flow over the next few years. CFO Braxton Carter has said he is working with the board to finalize a multiyear share repurchase authorization that they hope to have done by the time T-Mobile announces its first-quarter earnings results in April or May.

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With free cash flow expected to reach $4.5 billion to $4.6 billion in 2019 and benefits from tax reform kicking over the next decade, there's plenty of cash to return to shareholders over the next three-plus years. So what can T-Mobile investors expect management to present?

What analysts thought going into this year

When T-Mobile announced its initial buyback in December, it was very underwhelming.

Wells Fargo had estimated T-Mobile, along with its parent company Deutsche Telekom, could buy back $5 billion in stock this year. Deutsche Telekom has been buying shares of T-Mobile stock as well, but not at the same rate as T-Mobile.

Jeffries estimated a $10 billion buyback over "multiple years," and UBS analysts said T-Mobile could afford to buy back $17 billion worth of shares over three years.

Indeed, an 11-figure buyback is not out of the question, especially considering the free cash flow T-Mobile is expected to throw off over the next few years. If T-Mobile produces $13.5 billion in cumulative free cash flow over the next three years, a $10 billion authorization is well within reach.

What else could T-Mobile do with its cash?

Following the fallout of the failed Sprint merger, T-Mobile acquired Layer3 TV. But Carter has said he doesn't plan to do any other major acquisitions. He might do some "tuck-in" acquisitions to bolster the TV offering, but those won't be a material use of cash.

As time goes by, the potential for a Sprint acquisition becomes worse and worse, as T-Mobile acquires more customers, builds out its network, and buys more of its own spectrum licenses. So investors shouldn't hold out hope for yet another round of negotiations.

T-Mobile could use the cash to deleverage its operations, and in fact it called $1 billion worth of bonds at the beginning of the beginning of the year. But management now seems to be operating below its target leverage range of three to four times EBITDA. It had $31 billion in debt on its balance sheet as of the end of last year, and its adjusted EBITDA was $11.2 billion in 2017. Considering it's below its target, investors shouldn't expect T-Mobile to retire much more debt.

At some point the FCC will hold auctions for some high-band spectrum, which Carter says T-Mobile expects to spend a few billion dollars on. That spectrum will support wireless 5G networks, and it's about the only material thing that T-Mobile will spend its cash on outside of building out its network and opening stores.

T-Mobile is well on its way to becoming a free cash flow machine much like its larger competitors. And while it's not quite ready to issue dividends (and neither are its investors), it's going to have a lot of cash to return to shareholders. Investors should expect a massive capital return announcement with T-Mobile's first-quarter earnings release if not sooner. That $1.5 billion announcement in December was just an appetizer.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.