AT&T's (T -1.06%) stock lost over a quarter of its value last year. The tepid growth of its wireless segment couldn't offset its loss of pay TV subscribers and WarnerMedia's pandemic-related disruptions, and it continued to burn cash on its streaming services to challenge Netflix, Disney, and other platforms.

AT&T's debt levels remained high, and some investors questioned the sustainability of its dividend. T-Mobile (TMUS -0.02%) also surpassed AT&T as the second-largest wireless carrier in the U.S. after it merged with Sprint last April. All those headwinds were already keeping investors away from AT&T in 2020, and it didn't help that the market also favored higher-growth tech stocks that were better insulated from the pandemic.

However, that market sentiment has reversed over the past few months. Rising bond yields have sparked a rotation from growth to value stocks, and investors are pivoting from pandemic plays toward reopening ones. That shift brought some investors back to AT&T.

A map of wireless connections across the US.

Image source: Getty Images.

AT&T also agreed earlier this year to sell a 30% stake in DIRECTV, the ailing heart of its pay-TV business, to streamline its operations and reduce its debt. It posted better-than-expected first-quarter numbers in April that topped analysts' estimates for revenue, profit, and wireless subscribers, and HBO Max continued to expand with 44.2 million subscribers in the U.S.

This week, AT&T announced that it has agreed to spin off WarnerMedia and merge the unit with Discovery Communications (DISCA) (DISCK) to create a new company -- which would enable it to focus on the growth of its core wireless business. AT&T's current shareholders will receive a 71% stake in that new company.

As a result, AT&T's stock has advanced more than 15% this year as many other tech stocks tumbled. The stock still looks cheap at 10 times forward earnings and it pays a high forward dividend yield of 6.5%, but is it finally worth buying again as a long-term investment?

Are brighter days ahead for AT&T?

AT&T's revenue and adjusted earnings declined 5% and 11%, respectively, in fiscal 2020. Its wireless business stabilized in the second half of the year and it continued to gain streaming subscribers.

But its loss of traditional pay-TV subscribers, WarnerMedia's postponed movies, and its declining ad revenue offset those strengths. Its free cash flow (FCF) for the full year also dipped 5% to $27.5 billion.

AT&T's revenue and adjusted earnings rose 3% and 2% year over year, respectively, in the first quarter of 2021. Its mobility revenue rose 9% as it gained 595,000 wireless subscribers, and WarnerMedia's revenue increased 10% as HBO and HBO Max added 2.7 million new subscribers.

The growth of those two core businesses offset the softer growth of AT&T's wireline, pay-TV, and Latin American segments. It also benefited from an easy comparison to the pandemic's initial impact a year earlier.

AT&T expects its revenue to rise just 1% for the full year, for its adjusted earnings to come in flat, and for its FCF to drop another 5% to about $26 billion. Those estimates should remain unchanged, since AT&T doesn't expect to conclude the WarnerMedia spin-off until mid-2022.

What about AT&T's dividend?

The spin-off will likely free up some cash and enable AT&T to finally raise its dividend. It expects its dividend to remain stable this year with a payout ratio in the high 50s, but its quarterly payments have stayed the same over the past six quarters. That delay indicated it could break its 36-year streak of annual dividend hikes this year and lose its status as a Dividend Aristocrat of the S&P 500.

Losing that elite title might seem like bad news, but AT&T's total return -- which factors in reinvested dividends -- trailed far behind the S&P 500 over the past decade. Its rival Verizon (VZ 0.27%) also generated a much higher total return while paying a lower dividend yield.

T Chart

Source: YCharts

AT&T paid out nearly $15 billion in dividends last year, but that cash might be better spent elsewhere. It won't need to invest in new streaming content after merging WarnerMedia with Discovery, but it could still upgrade its 5G networks to catch up to T-Mobile. 

AT&T could also allocate more of that cash toward taming its long-term debt, which ballooned over the past decade following the acquisitions of DIRECTV, AWS-3 spectrum licenses, and Time Warner. The spin-off will remove some of that debt from its balance sheet, but its debt-to-equity ratio will remain high.

T Total Long Term Debt (Quarterly) Chart

Source: YCharts

AT&T paid nearly $8 billion in interest expenses on that debt last year. Therefore, AT&T's investors might be willing to accept a suspension of its annual dividend hikes (or even a dividend cut) if it wisely uses that cash to extinguish more debt or improve its business.

The road ahead

AT&T is gradually evolving, but it's still a slow and messy process. Its previous purchases of DirecTV and Time Warner were disastrous, and its wireless business is losing its edge against T-Mobile.

I've owned AT&T for several years, but I still don't have high expectations for the stock this year. Its low valuation and high yield might limit its downside potential, but investors looking for simpler businesses with better growth should consider buying shares of Verizon or T-Mobile instead.