This Unstoppable Telecom Giant Returned More Capital to Shareholders Than Both AT&T and Verizon Over the Past Year, and It Just Raised Its Dividend 35%

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One thing that attracts many investors to telecom stocks are the great dividend yields offered by many companies in the industry. Subscription revenue and long-term contracts are a great recipe for predictable free cash flow. And many of the biggest companies in the industry are happy to return that cash to shareholders.

Verizon Communications (NYSE: VZ), for example, paid out $11.2 billion to shareholders over the last 12 months. The stock currently boasts an attractive dividend yield of 6.6%. AT&T (NYSE: T) has slimmed down over the past few years, now focusing exclusively on its telecom business. It sports a 5% dividend yield, paying out $8.2 billion to shareholders over the past year.

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But one of its biggest competitors has returned even more cash to shareholders. T-Mobile (NASDAQ: TMUS) returned a total of $11.8 billion over the past year. The only caveat is this telecom giant is primarily using share repurchases in its capital-return program, something that’s practically non-existent recently at Verizon and AT&T.

Over time, however, T-Mobile could shift that focus to dividends. In fact, management just announced a 35% increase to its dividend payout, bringing its yield to a healthy 1.6%. T-Mobile’s massive capital-return program could prove even better for shareholders than big cash dividends from its competition.

Image source: Getty Images.

There are really only two ways for management to return excess cash to shareholders: share repurchases and dividends.

Dividends are straightforward: The company pays owners a set amount of cash per share, usually on a regular cadence like every quarter. While management isn’t obligated to pay out the same amount every period, dividends are generally very sticky. Once a company starts paying a certain amount, they try to keep paying at least that much. Often, a company will raise its dividend over time. Verizon has increased its dividend annually for 18 straight years.

Share repurchases, on the other hand, are an indirect way to return cash to shareholders. Instead of distributing cash, management uses it to buy shares of the stock in private deals or on the open market. The shareholders end up with a greater share of the business.

Another way to think of it is shareholders receive equity in the business instead of cash. It’s almost the same as a shareholder who automatically reinvests dividends into the stock. However, there’s much less of a tax drag on the transaction. Share repurchases incur a 1% tax (paid by the business); qualified dividends are taxed at the long-term capital gains tax rate (paid by the shareholder).

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