Analysts approach sky-high share price with caution
But the big question for Telstra investors - including its 1.4 million retail shareholders - is whether this upward trajectory can continue.
Some telco analysts believe Telstra shares - one of Australia's most widely held stocks - are too expensive, and have advised their clients to reduce their holdings.
Analysts at brokers UBS recently downgraded Telstra to a sell, calculating that Telstra shares are trading at a 25 per cent premium to their valuation of the share. UBS's analysts believe Telstra's sky-high share price has been propped up by the recent market thirst for high-yielding stocks, with many investors buying Telstra shares as a proxy high-yielding bond.
The telco has been paying a 28¢ fully franked dividend since 2006.
Analysts Alice Bennett and Nathan Burley from Commonwealth Bank have also argued Telstra shares are expensive and have changed their recommendation to "underweight", saying investors should reduce their holdings.
"Telstra's recent run reflects investors seeking value relative to peers and confidence in its transformation," they told clients in a research note. "However, we reiterate our underweight recommendation, especially at current levels."
But industry analysts believe Telstra is winning the crucial 4G (the next generation of super-fast mobile networks) battle between the telcos.
Telstra out-spent its rivals at the spectrum auction, which involves the sale of spectrum freed up by the switch to digital TV, by more than $700 million.
It spent about $1.3 billion for spectrum in the 700 MHz band - which carries signals long distances - and in the 2.5 gigahertz band, which is good for inner-city networks.
Mobile operators must have enough spectrum to carry users' data or their networks become clogged and speeds are reduced.
Optus, the second-biggest carrier in the country, spent only about half as much as Telstra.
The company said the high cost of reserve price for spectrum prompted it to look at other options.
Goldman Sachs said Telstra had secured "a dominant spectrum position", acquiring between 40 per cent and 50 per cent of spectrum available.
"We believe this extends Telstra's already significant competitive advantage over its competitors, particularly Vodafone Australia, which did not participate in these auctions," Goldman Sachs told clients in a note.
Fresh numbers from Telstra back up Goldman Sachs' analysis.
The telco added added 600,000 new 4G customers since it announced its half-yearly profit in early February.
Frequently Asked Questions about this Article…
Telstra shares hit about $5.10 and traded above $5 during the week — a level not seen in roughly eight years. The rise has been driven in part by investor demand for high-yielding stocks and confidence in Telstra's business transformation, including its strong positioning in the move to 4G.
Yes. Some telco analysts have warned Telstra shares look expensive. UBS recently downgraded the stock to a sell, saying it trades about a 25% premium to their valuation, and analysts at Commonwealth Bank moved to an "underweight" recommendation, advising clients to reduce holdings at current levels.
UBS argues Telstra's high share price has been propped up by the market's thirst for high-yielding stocks rather than fundamentals, estimating a roughly 25% premium to fair value. Commonwealth Bank analysts Alice Bennett and Nathan Burley said the recent run reflects investor confidence and relative value versus peers but reiterated an underweight stance and urged reductions at current prices.
Telstra has been paying a 28 cent fully franked dividend since 2006. That steady payout has made the stock attractive to yield-seeking investors, with some buying Telstra as a proxy for a high-yielding bond — a factor cited by analysts as supporting the recent price strength.
Yes. Telstra outspent rivals by more than $700 million in the auction and spent about $1.3 billion on spectrum in the 700 MHz and 2.5 GHz bands. That spectrum is important because it carries mobile data over long distances and supports high-capacity inner-city networks, helping avoid network congestion and maintain speeds.
Goldman Sachs said Telstra secured a "dominant spectrum position," acquiring roughly 40–50% of the spectrum available in the auction. The bank said this strengthens Telstra's competitive advantage over rivals, particularly Vodafone Australia, which did not participate.
Optus spent about half as much as Telstra in the auction. Vodafone Australia did not participate in these auctions. Telstra's larger spend and spectrum share have been highlighted as giving it an edge over those competitors.
Yes. According to fresh numbers in the article, Telstra added 600,000 new 4G customers since it announced its half-yearly profit in early February, which supports the view that its network investments are translating into customer growth.
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