Telstra Group Ltd (ASX: TLS) shares hit a multi-year high last week.
They have since fallen 6%.
That kind of reversal after a strong run tends to unsettle investors.
But is the selling a warning sign, or simply a natural pause after an extended rally?
The answer matters, because Telstra has become one of the more widely held defensive stocks on the ASX in 2026.
Image source: Getty Images
What happened
The pullback started when investors began locking in gains after the share price spiked to a multi-year high early last week.
That profit-taking was then accelerated when a flurry of brokers downgraded their outlooks on the stock.
Most notably, Shaw and Partners named Telstra as a sell this week, stating:
Telstra is currently trading at elevated levels, in our view, with its defensive appeal pushing the share price higher. We believe its limited growth potential and narrowing dividend yield make the risk-reward less attractive at current prices.
The bull case is still intact
The bear case on Telstra is primarily about valuation, not the business itself.
And the business itself continues to perform well.
Telstra shares are up 7% year to date and 10% higher than this time last year, even after this week's pullback.
The company's mobile division remains the dominant force in Australian telecommunications, with pricing power and subscriber growth continuing to support revenue.
The $1.25 billion on-market share buyback announced earlier this month is a signal of management's confidence in the business at current prices.
In the first half of FY2026, Telstra delivered mobile services revenue growth of 5.6% and group cash EBIT growth of 14%, confirming the underlying momentum is real.
Analysts forecast a full-year FY2026 dividend of 21 cents per share, representing a 10% increase on FY2025, with UBS forecasting further dividend increases through to FY2030.
The valuation debate
The crux of the bear argument is that Telstra now trades at a premium to its historical average, with its defensive qualities fully priced in.
Brokers have an average price target of $5.33, implying a slight downside from current levels.
That is a tight spread between current price and consensus target, which limits the upside case for new buyers.
Furthermore, the defensive premium that Telstra commands could come under pressure if interest rates stay elevated, as higher rates make income from term deposits and bonds more competitive relative to dividend stocks.
That dynamic is one reason Shaw and Partners cited the narrowing dividend yield as a concern.
Foolish takeaway
The 6% pullback in Telstra shares does not signal anything fundamentally wrong with the business.
The mobile franchise is strong, the dividend is growing, and the buyback shows board confidence.
What the selloff does reflect is a valuation that had run ahead of the underlying growth rate.
For long-term income investors already holding Telstra, there is little reason to panic.
For new investors considering entry, the current pullback has created a marginally better starting point than last week.
