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T-Mobile US to Offer Stocks & Other Freebies to Customers

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T-Mobile US Inc. (TMUS - Free Report) , the fastest growing wireless carrier in the U.S., has introduced the ‘Get Thanked’ program to execute a series of giveaways. Under the program, T-Mobile US will give its customers free Domino’s pizzas, Wendy’s ice-creams, movie rentals and a bunch of other freebies through its T-Mobile Tuesdays app. While free giveaways and cash credits have been frequently used by wireless players to retain customers in the heavily contested telecom market, none of these came close to T-Mobile US’ latest ‘Stock Up’ promotional campaign – an innovative idea of granting a stock to its postpaid customers.

Would Giving Away Free Stocks Do the Trick?

Of late, T-Mobile US’ customer base has been growing impressively. At the end of first-quarter 2016, the company’s branded postpaid phone customers totaled 30.232 million, up 12.7% year over year. The branded postpaid mobile broadband customer count was 2.504 million, up a substantial 69.8%. The quarterly churn rate was also stable at 1.3%. Most of these came on the back of the novel ‘Un-carrier’ campaign as well as T-Mobile US’ efforts on network improvement and modernization. However, with rivals like AT&T Inc. (T - Free Report) , Sprint Corporation and Verizon Communications Inc. (VZ - Free Report) stepping up the game by the introduction of aggressive promotional plans, the cost for a customer to switch to another carrier’s network, commonly known as switching cost, is now at an all-time low. In general, a high switching cost in any industry translates higher customer retention.

Meanwhile, under the ‘Stock up’ plan, T-Mobile will give each of its postpaid customers a stock of the company as a gesture of gratitude. Customers can also get a stock per referral with a cap of 100 stocks in a year. However, there will be no new issue of shares, except for a stock buyback from the market and re-issuance of the same to eligible customers. The entire operation will be undertaken by Loyal3, an online brokerage firm.

Our Analysis

Given that the ‘Stock up’ plan is the first of its kind, let’s try to analyze the effects of such an initiative on the company’s finances, share price and most importantly, its investors.

Per the buyback plan, the company has registered 1 million shares under a regulatory filing on Monday. However, with T-Mobile US’ postpaid customer base of 10 million, there is an inherent risk of customers demanding for more than 1 million of such shares. This could stretch the company’s share price for a short period, increasing the cash outflow for T-Mobile US, thereby causing short-term liquidity pressure.

Meanwhile, if the company successfully implements and manages this operation, the buyback activities will drive its shares. Apart from this, an increase in customer count would also be a positive for the stock. Moreover, the cost of executing this plan could be lower than other customer incentive and loyalty plans such as cash credit and payment of termination charges for facilitating customer transition from other carriers. However, a widespread redeeming of stock for cash will exert selling pressure, dragging the stock down.

T-Mobile currently carries a Zacks Rank #3 (Hold).

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