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Telecom giant AT&T (T) reported strong second-quarter results Tuesday. The firm earned $0.66 per share, three cents higher than what consensus had expected and 10% higher than the same period last year. The operating margin soared to 30.3% during the second quarter from 26.9% in last year's period thanks to the company's wireless segment, which grew its EBITDA margin nearly 400 basis points, to 45%. Still, the shares look fairly valued at current levels. Please view our valuation report on AT&T here.

We believe AT&T's recent margin expansion in its wireless business is sustainable over the long term. The fact that the company has 61.9% of its postpaid customers using smartphones, up from 49.9% last year, speaks to the stickiness of smartphones and the long-term attractiveness of the market. Smartphones carry higher average revenue per user (ARPU) as well as expensive overages and add-ons that can add up. However, there will be some short-term hiccups. The firm activated 3.7 million iPhones (AAPL) out of 5.1 million total smartphone activations. We suspect the iPhone figure was relatively low as consumers are awaiting the release of the iPhone 5, but we think that number with accelerate and weigh on margins over the near term when it is finally released. AT&T subsidizes sales of new versions of phones (like the iPhone 5, for example).

During the second quarter, the firm also posted growth in its U-Verse segment, with revenues growing 1.7% year-over-year. With clarity on the T-Mobile deal achieved (AT&T ended its effort to buy T-Mobile in December 2011), the firm instead has decided to use cash to repurchase $2.5 billion in stock, reducing its share count by 1.3%. Though we think shares are trading above our fair value estimate (but still within our fair value range), AT&T has a very strong track record of paying its dividend thanks to its predictable earnings stream. Still, we don't think the firm is a particularly compelling investment, for our Dividend Growth portfolio with payout growth expected to be in the low-single-digits for some time to come.

Source: AT&T Reports Strong Second Quarter Results Thanks To Margin Expansion

Additional disclosure: AAPL is included in the portfolio of our Best Ideas Newsletter.