Analysts approach sky-high share price with caution

Telstra shares are trading at their highest levels in about eight years - hitting $5.10 on Friday after sitting above $5 all week.

Telstra shares are trading at their highest levels in about eight years - hitting $5.10 on Friday after sitting above $5 all week.

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 28ยข 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.

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