Challenger Ltd share price down 4.4% on broker downgrades

The Challenger Ltd (ASX: CGF) share price has fallen by 4.41% today after several brokers downgraded the stock.

Macquarie Group Ltd (ASX: MQG) downgraded the annuity provider to neutral from outperform today. It also cut the price target by 3.6% to $12.95, which is above the current share price of $12.33

Citi analysts also cut the price target, it was reduced by 3.8% to $13.75.

UBS analysts cut the price target too, it was reduced by 5.1% to $12.90.

I think it’s important to note that all three price targets are now above the current share price after the drop.

Challenger’s share price has risen by 7.8% over the past year, even after today’s drop. The brokers may be right in saying that the next year could be tough because of rising interest rates, which affects Challenger more than most other financial stocks.

Challenger may not have reported a fantastic set of numbers yesterday, but I think it was still reasonable with assets under management (AUM) up by 18% and normalised net profit after tax (NPAT) up by 6%.

The business has a good tailwind ahead of it thanks to Australia’s ageing population which is steadily adding to the retiree pool. Rising interest rates may hurt Challenger’s financials a little, but market volatility could encourage people to take up an annuity to avoid risk.

Foolish takeaway

Challenger is currently trading at 18x FY18’s estimated earnings with a grossed-up dividend yield of 4.08%. I think this is a good price to pay for a business that has excellent long-term prospects. I’d be interested if it weren’t already such a big part of my portfolio, so I’m waiting for a price below $11.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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