In early August, when T-Mobile US Inc. (TMUS, Financial) announced its second-quarter earnings results, it proudly proclaimed that it had more postpaid net customer additions than rivals AT&T Inc. (T, Financial) and Verizon Communications Inc. (VZ, Financial) combined. It also emphasized its leadership in U.S. 5G coverage:
“T-Mobile is the leader in 5G with the country’s largest, fastest, most reliable and most awarded 5G network. The Uncarrier’s Extended Range 5G covers nearly everyone in the country – 320 million people, delivering more geographic coverage than Verizon and AT&T combined. 235 million people nationwide are covered with super-fast Ultra Capacity 5G, and T-Mobile expects to cover 260 million in 2022 and 300 million next year.”
When we combine T-Mobile’s 5G leadership with its commitment to keeping prices low even as competitors raise prices, it is clear to see why T-Mobile is snapping up additional market share. This company truly is winning the 5G market.
However, does that mean investors should be interested in its stock? While maintaining a growth trajectory even as competitors decline is a huge positive in the stock’s favor, T-Mobile’s growth is expensive. It also does not pay a dividend, so investors will need to rely entirely on capital gains for returns.
Growth in a closed market
According to Pew Research Center’s survey of smartphone ownership, 97% of Americans now own a cell phone of some kind and 85% own a smartphone. In 2011, just 35% of Americans owned smartphones while 86% owned cell phones of some kind.
The growth in smartphone ownership was sharp from 2011 to 2016, going from 35% to 77% of the U.S. population. However, after that point, smartphone adoption continued at a much slower pace, rising just 8% over the course of the next five years.
The reality is that T-Mobile and its peers operate primarily in a closed market. There is still a little room for the demand for mobile smartphone plans to grow in the U.S., but it will almost certainly rise at a snail’s pace. There is nowhere left for these companies to secure growth unless they gain some advantage over each other.
What about international growth? Mobile wireless infrastructure falls under a similar category to railroads in this respect. Customers need to be within the service area of their carrier’s wireless towers in order to receive service. In theory, it would be possible to create a network of towers for the same carrier all over the world, but that would require a level of international cooperation and the creation of a monopoly that just is not feasible.
Thus, carriers find themselves geographically closed. T-Mobile itself is the U.S. subsidiary of German telecommunications company Deutsche Telekom AG (XTER:DTE, Financial), which owns 64% of its common stock.
Seeking growth first in a closed market means that T-Mobile cannot just rely on the last 15% of holdouts in the U.S. to make the switch to smartphones. It also has to attract customers by offering superior service (which requires investing more money in building out its network) and by keeping prices lower than competitors.
What about diversification?
If T-Mobile and its peers are unlikely to secure meaningful growth with their main business operations, could they grow via diversification into different industries?
Unfortunately, diversification efforts are hampered by the capital-intensive nature of these businesses. They barely have the money to keep up with the evolution of their industry; how would they be able to make the investments required to purchase and/or revitalize other businesses?
Case in point, T-Mobile diversified into entertainment and streaming by acquiring Time Warner, but because it did not have enough capital to invest in the development of quality content, it turned around and split off Warner Bros. so that it could merge with Discovery to form Warner Bros. Discovery Inc. (WBD, Financial).
Capital gains vs. dividend gains
While some might argue that T-Mobile’s lack of a dividend is justified in the pursuit of growth, capital gains are not always the best way to profit from a stock. It really depends on the type of company. Given the limited growth prospects of telecommunications companies, is it truly better to forego a dividend?
Let’s take a look at the historical numbers. Year to date, T-Mobile’s stock is up 25.69% on optimism for its strong 5G growth, while Verizon is down 16.22% and AT&T has lost 3.70%. Over the past five years, T-Mobile has averaged stock price growth of 26% per year compared to a 2% per year decline for Verizon and an 11% per year decline for AT&T. In terms of dividends, T-Mobile yielded 0%, while Verizon had a yield of between 4% and 6% and AT&T paid between 5% and 8%.
By no means does correlation indicate causation here. There have been many other factors contributing to T-Mobile’s growth, most notably its merger with Sprint in 2022. On the other hand, with AT&T seemingly past its glory days of 4G leadership, it’s no wonder the stock is floundering.
However, what we can conclude from this data is that not paying a dividend has not automatically made T-Mobile a worse investment than its peers. A dividend is nice, but having additional funding to grow the business is also helpful for capital-intensive companies.
You won’t get rich, but you won’t go broke
On the subject of capital-intensive businesses, Warren Buffett (Trades, Portfolio) once said, “You won’t get rich, but you won’t go broke either. You are better off in businesses that are not capital intensive.”
Capital-intensive businesses like telecommunications do not just grow on their own. In order to earn more money, they have to spend more money, and even if they are taking market share away from competitors, they could easily lose it again if one of their major peers began spending more.
When it comes to a capital-intensive oligopoly like the one that T-Mobile, AT&T and Verizon hold over the U.S. mobile carrier market, acquisitions become difficult not only due to cost concerns but also because they are difficult to get past regulators, which means further growth usually has to come from winning over competitors with superior offerings or lower prices.
Even with T-Mobile’s current advantage, keeping its success going will be difficult and costly. Moreover, the merger between T-Mobile and Sprint was an outlier; we are extremely unlikely to see another merger of that kind, at least in the U.S. market.
All things considered, I find myself thinking of the above Buffett quote when it comes to T-Mobile: “You won’t get rich, but you won’t go broke either.” As long as T-Mobile can remain the leader in 5G and continue gaining subscribers, its stock price will likely do well enough, but the massive boost from the Sprint merger will not come again, and T-Mobile is no more guaranteed to be the leader of the next generation than AT&T was.
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