AT&T (NYSE:T) is often considered a classic income investment. The telco giant is an elite "Dividend Aristocrat" -- a member of the S&P 500 that's hiked its dividend annually for over 25 straight years -- and pays a hefty forward yield of 5.7%.

AT&T's status as America's second largest wireless carrier, top wireline services provider, and biggest pay TV provider also gives it a wide moat against its rivals. That makes it seem like an ideal stock for conservative income investors.

An AT&T store.

Image source: AT&T.

However, shares of AT&T tumbled nearly 20% over the past 12 months, completely erasing its dividend gains, as the S&P 500 rallied more than 10%. The stock also recently dropped to a 52-week low after its first quarter numbers missed expectations on both the top and bottom lines.

Many investors are likely wondering if AT&T's dividend is worth all the pain. Let's dig deeper into the bear and bull cases for the stock to find out.

Why investors should sell AT&T

Last quarter, AT&T's revenue slid nearly 3% annually to $38.04 billion, missing estimates by $1.3 billion. That marked its sixth straight quarter of revenue declines.

AT&T added 3.2 million wireless subscribers during the quarter, but a large portion of that total came from connected IoT (Internet of Things) devices. On the mobile front, it actually lost 400,000 postpaid subscribers, while adding just 300,000 prepaid subscribers.

It posted year-over-year revenue declines across its wireline, domestic video, and wireless service businesses. Those declines were only partly offset by revenue growth at its strategic business services and wireless equipment units. 

AT&T added 312,000 DirecTV subscribers during the quarter, bringing its total subscriber count to nearly 1.5 million, but it only gained 125,000 video subscribers during the quarter due to a loss of subscribers from its other video units (like DirecTV's satellite service).

A woman uses a smart TV.

Image source: Getty Images.

The fact that AT&T is adding subscribers but posting revenue declines indicates that it's losing its pricing power. To further complicate matters, AT&T posted accounting changes and resegmentations of its U.S. wireless business, which made year-over-year comparisons "messy" and complicated according to Cowen analyst Colby Synesael.

AT&T's planned $85 billion takeover of Time Warner (NYSE:TWX.DL), which would make it one of the biggest media companies in the world, also remains in limbo due to a Department of Justice lawsuit. The company already spent $1.1 billion on debt interest and takeover-related fees waiting on the verdict last year, and piled on another $67 million in integration costs during the first quarter.

Rising interest rates will also hurt AT&T in two ways. First, higher rates will make it tougher for AT&T to pay off its $163 billion in debt. Second, higher rates make bonds more attractive to income investments than high-yielding dividend stocks like AT&T.

Why investors should hold AT&T

Despite all those headwinds, AT&T still expects to generate $21 billion in free cash flow (FCF) this year,  up from $17.6 billion last year. That gives it plenty of room to raise its dividend, since it spent just 67% of its FCF on dividends last year.

It's also still growing earnings at a decent rate, thanks in part to buybacks and layoffs. Its adjusted earnings rose 15% annually to $0.85 last quarter, but missed estimates by a penny. Analysts, on average, expect AT&T's revenues to stay flat this year as its earnings rise 13%.

AT&T's valuation also looks attractive at current levels. At $33, it trades at less than 10 times this year's earnings. For comparison, Verizon (NYSE:VZ) -- which recently posted a much stronger quarter than AT&T -- trades at 11 times this year's earnings. Verizon also pays a lower forward yield of 4.9%.

Lastly, if AT&T finally closes the Time Warner deal its digital ecosystem will expand significantly, with new options to bundle its DirecTV, wireless, and wireline services. That should lead to a revaluation of AT&T's stock -- which may, in retrospect, seem cheap at today's prices.

The bottom line

AT&T is my third largest holding, and it's certainly tested my patience over the past year. However, I'm willing to hold on for a bit longer, reinvest my dividends, and see if it can turn things around. I'm not sounding an all clear on AT&T, but I think it could be a mistake to sell this stock at its 52-week low.

 

Leo Sun owns shares of AT&T. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.