Telstra shares jump following first nod from JPMorgan in six years

TELSTRA shares jumped 9? yesterday to close at $2.74, the highest closing price since September 20, after JPMorgan analysts recommended the share for the first time in six years.

By InvestSMART · 24 Nov 2010

By InvestSMART ·
24 Nov 2010

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TELSTRA shares jumped 9? yesterday to close at $2.74, the highest closing price since September 20, after JPMorgan analysts recommended the share for the first time in six years.

Last week Telstra's board confirmed it would pay shareholders a fully franked dividend for at least two years, making it one of the highest returning shares on the market.

Analysts are recommending Telstra despite ongoing uncertainty over the introduction of the national broadband network, with key regulatory legislation awaiting senatorial approval.

Telstra is also smarting after the Future Fund last week said it would sell down its 9.8 per cent stake in the company in coming months.

Trading in Telstra was strong yesterday, with more than 175 million shares changing hands, compared with 225 million last week. "For the first time in six years we see value in the stock and an interesting risk-return profile on Telstra," a note by JPMorgan telecommunications analyst Laurent Horrut said. He increased the price target to $3.08 up from $3.06 with an "overweight" rating, which recommends Telstra shares should be a large part of a managed fund.

"A lot has been said about Telstra's high yield [of 11 per cent]. It is one of the highest both domestically and internationally. More importantly for us it does now appear secure for at least the next two years."

But while the dividend of 28? annually can be maintained, the franking credits might not last. Telstra needs to pay at least $1.5 billion in tax every year to generate enough franking credits to fully frank the 28? dividend, which means it needs to earn at least $3.5 billion post-tax. Earning less would put franking at risk, Mr Horrut said.

Two new mobile providers entered the Australian market this week: Europe-based Amaysim (on the Optus network) and British-based Lycamobile (on Telstra's 2G network). Both offer per-minute rates of 15?, and 5? per text. Amaysim is planning a three-year marketing campaign.

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Frequently Asked Questions about this Article…

Why did Telstra shares jump recently after JPMorgan's recommendation?

Telstra shares rose about 9% to close at $2.74 after JPMorgan gave the stock a buy-style "overweight" recommendation for the first time in six years, saying the share offered value and an attractive risk-return profile and raising its price target to $3.08.

What did JPMorgan say about Telstra's dividend and yield?

JPMorgan highlighted Telstra's high yield—about 11%—and noted the company's board has committed to paying a fully franked dividend for at least two years, which helped support the positive recommendation.

Are Telstra's franking credits secure and what could put them at risk?

JPMorgan warned that while the dividend looks maintainable for now, Telstra needs to pay around $1.5 billion in tax each year to generate enough franking credits to fully frank the current payout; that implies the company would need to earn roughly $3.5 billion post-tax, and earning less could put franking at risk.

How might the Future Fund's plans to sell its stake affect Telstra shares?

The Future Fund said it will sell down its 9.8% stake in Telstra in coming months, a move that the article says has left Telstra "smarting"—large-scale sell-downs can add selling pressure or increase volatility, though the exact market impact will depend on timing and investor demand.

What regulatory risk does the national broadband network (NBN) pose to Telstra?

Analysts remain cautious because key regulatory legislation for the national broadband network is still awaiting senatorial approval, creating ongoing uncertainty about how the NBN rollout and rules might affect Telstra's business and future earnings.

How active was trading in Telstra shares around the announcement?

Trading picked up: more than 175 million Telstra shares changed hands on the day of the jump, compared with about 225 million shares traded the previous week, showing strong investor interest around the news.

Which new mobile providers entered Australia and could they affect Telstra?

Two new entrants mentioned are Europe-based Amaysim (operating on the Optus network) and UK-based Lycamobile (on Telstra's 2G network). Both offer low-rate plans—around 15c per minute and 5c per text—and increased competition in the mobile market could put pricing pressure over time.

What should everyday investors take away from the JPMorgan call on Telstra?

The JPMorgan note signals renewed analyst confidence in Telstra's value and dividend security for at least the next two years, but investors should weigh that against risks such as NBN regulatory uncertainty, potential franking-credit pressure if earnings fall short, and the Future Fund's planned sell-down of its 9.8% stake.