Last week, Telstra Corporation Ltd (ASX: TLS) posted a mighty 22.4% increase in net profit for the six months to 31 December, 2014.
Undoubtedly, for an $80 billion company, such a big boost to profits doesn't go unnoticed.
However, since it released those results to the market, its share price hasn't moved an inch. Perhaps the reason its share price hasn't moved can be put down to its current valuation.
Indeed, at over $6.50 per share, investors must be willing to pay 19.5 times Telstra's expected profits in 2015 and over 5.9 times its assets. Telstra itself stated it is expecting just, "low-single digit" revenue growth.
Whilst its forecast 30 cent fully franked dividend – equivalent to 4.5% at today's prices – might seem like the elixir for low interest rates, a capital loss from an overvalued share price will quickly wipe out any perceived benefit from its dividend yield.
Now, if you think I'm sticking my neck out when I say it's way too expensive to buy, think again.
According to The Wall Street Journal, five of the 19 analysts covering Telstra have a 'Sell' or 'Underweight' rating on the stock, up from just three one month ago. More than half believe it is a 'Hold' while only four say it's a 'Buy'.
I usually take analysts' estimates with a grain of salt but the numbers seem a little overwhelming. And from my analysis, an investment in Telstra does not look to be as safe as many investors would expect. It's important to remember business quality is one thing, valuation is another.
So whilst Telstra may be one of the best dividend-paying stocks in the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO), even it will become overvalued, at times.
Currently, I believe it isn't cheap.
In saying that if I were investing for more than five years, and I could honestly bear to see it drop by 20%, 30% or even 40% from today's price, than I'd happily keep holding some shares because of its long-term income and growth potential – so long as it wasn't distorting the balance of my portfolio.
