Company Shows Dividend Champion Potential, Could Announce Hike Next Month

The Power of Dividend Stocks

Dividend stocks can be a powerful tool for investors seeking reliable, passive income. However, not all dividend stocks are created equal. While high dividend yields may seem attractive, they can sometimes signal underlying issues within a company. For example, if a company is struggling financially and its stock price drops significantly, the dividend yield might appear high, but the company could still face the risk of cutting its dividend.

To ensure long-term stability, investors should thoroughly analyze a company's financials. It's crucial to verify that the company has sufficient free cash flow and earnings to both cover and increase its dividend annually. One company that stands out as a potential Dividend Champion is currently showing promising signs.

T-Mobile's Strong Performance

T-Mobile, one of the largest mobile carriers in the United States, has experienced significant growth. As of August 14, shares of T-Mobile have risen over 14% this year. In the second quarter, the company reported diluted earnings per share of $2.84, a 14% increase from the previous year. Total revenue grew nearly 7%, driven by new customer acquisitions, including 1.7 million postpaid net customer additions—the highest second-quarter additions ever recorded by the company. Additionally, T-Mobile saw a 12% year-over-year increase in 5G broadband customers, adding 454,000 new users.

T-Mobile’s success is partly attributed to its marketing strategy of being the "un-carrier." This approach involves eliminating hidden fees and avoiding long-term, restrictive contracts, which has helped attract a growing customer base.

A New Dividend with Growth Potential

T-Mobile is relatively new to the dividend game, having only initiated its dividend in 2023. The initial quarterly dividend was set at $0.65, but management increased it to $0.88 in September 2024—a 35% hike. At the current stock price, this translates to an annual yield of 1.40%. While not a high yield, it represents a strong start for a company that has been paying dividends for less than two years.

The dividend appears sustainable for now, with T-Mobile maintaining a trailing 12-month free cash flow yield of 4.25% and a payout ratio of nearly 31%. Over the past year, the company has paid out approximately $3.78 billion in dividends. Management is forecasting $17.8 billion in free cash flow for the year, which is more than enough to support the current dividend payout.

A further dividend increase could be on the horizon. When T-Mobile first introduced its dividend in late 2023, management expressed an intention to grow it by 10% annually. Given that the last dividend hike occurred in September 2024, another increase could come next month based on the company’s track record.

Is T-Mobile a Dividend Champion in the Making?

A Dividend Champion is defined as a company that has raised its quarterly dividend for at least 25 consecutive years. While T-Mobile is off to a strong start, it still has a long way to go before it can be considered a true Dividend Champion. There are also some risks to consider, such as high debt levels. At the end of the second quarter, T-Mobile had $6.4 billion in short-term debt and over $75 billion in long-term debt. Cash and cash equivalents were roughly $10.3 billion. Part of this debt stems from several acquisitions made since 2021, with eight acquisitions completed in recent years.

Despite these challenges, T-Mobile's business momentum and strategic moves have led to improved revenue and free cash flow growth. While it's uncertain whether T-Mobile will become a Dividend Champion in the future, the current trajectory of its dividend looks promising.

Should You Invest in T-Mobile US?

Before investing in T-Mobile US, it's important to consider various factors, including the company's financial health, growth potential, and market position. Some analysts have identified other stocks with strong growth potential, and while T-Mobile wasn't among them, there are always opportunities for investors to explore. By carefully evaluating the company's performance and future outlook, investors can make informed decisions about their portfolios.