Why these big investors own T-Mobile

T-Mobile (TMUS 0.78%) has a list of major investors that might surprise you. First, the Oracle of Omaha, Warren Buffett, owns 5.2 million shares of T-Mobile within his conglomerate, Berkshire Hathaway. Berkshire’s stake represents less than 1% of T-Mobile’s outstanding shares, but it has the backing of one of the world’s most legendary investors.

Japanese holding company Software bank owns about 61 million T-Mobile shares, or 5% of the company. The investment grew out of Softbank’s 2013 merger with Sprint, which later merged with T-Mobile in 2020. Later in 2021, Softbank sold most of its stock to Deutsche Telekom but retained its 5% allocation.

The deal made Deutsche T-Mobile the largest owner, with 48.4% of its shares outstanding. Although Deutsche owns less than half of T-Mobile’s shares, it has majority voting rights due to the voting agreement it reached with Softbank following the stock sale. So what do these heavy hitters see in T-Mobile?

A new leader in 5G wireless

The merger between Sprint and T-Mobile gave the combined company dominant infrastructure and spectrum licenses to transition to 5G service in the United States that neither had before the merger. Its 5G midband network now covers 235 million Americans. On the other hand, Verizon has a C-band 5G network that covers 135 million Americans and plans to reach 175 million by the end of the year.

T-Mobile has always been the cheapest carrier of the big three (T-Mobil, Verizon and AT&T). When you combine the lowest price with the best coverage, the results speak for themselves. During the second quarter of this year, T-Mobile surprised investors by adding 1.7 million postpaid wireless customers. AT&T also saw subscriber growth in the quarter, but relied on promotional pricing to do so. Verizon lost postpaid subscribers.

Image source: Getty Images.

Perhaps the biggest windfall for T-Mobile could be the completion of its merger with Sprint. Since the legal portion of the merger was completed in 2020, T-Mobile has spent a significant portion of its capital expenditures on reorganizing cell sites, closing duplicates, and integrating the two networks. The company says the work will be completed by the end of September and associated costs will be waived. To put the cost-cutting impact into perspective, T-Mobile spent more than $3.1 billion in merger-related expenses in 2021 and generated $3 billion in net income.

T-Mobile’s net income and cash flow profile are expected to increase over the next few years. In the meantime, management will be responsible for allocating the additional cash in the best interests of extraordinary shareholders.

What does this mean for investors?

T-Mobile management has discussed the possibility of buying back $60 billion of its stock between 2023 and 2025. Given that T-Mobile’s market capitalization is $180 billion and Deutsche owns about half of it, or $90 billion, $60 billion stock buyback plan could take out two-thirds. of the remaining $90 billion in floating stock. A stock buyback program would increase the ownership percentage of the big three investors without them lifting a finger.

T-Mobile shares are up 24% this year and beat the S&P500 of 40 percentage points. Wall Street analysts expect the company to earn $2.27 a share this year. After lower merger-related costs, analysts’ estimates rise to $6.07 per share in 2023, implying the stock is currently trading at a price-earnings ratio of 23.5 times earnings per share. of 2023.

This could be a bargain for a fast-growing company with the potential for massive share buybacks over the next few years. So it’s easy to see why seasoned telecom investors like Softbank and Deutsche Telekom love the stock. It goes without saying that Buffett is also knowledgeable in stocks. Investors may want to get on their heels and add T-Mobile to their own portfolios.

BJ Cook holds positions at Verizon Communications. The Motley Fool has positions and recommends Berkshire Hathaway (B shares) and SoftBank Group Corp. The Motley Fool recommends Softbank Group, T-Mobile US and Verizon Communications and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares ) and short $265 call options in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Casey J. Nelson