Is the Challenger Ltd (ASX:CGF) share price in danger?

The Challenger Ltd (ASX: CGF) share price could come under pressure in the medium-term due to two significant reasons.


Challenger is the clear market-leader in the annuity space in Australia with an estimated 90% of new annuities heading to the fund manager.

It’s one of the key beneficiaries of Australia’s ageing population as the core customer group for Challenger is people entering retirement who want a guaranteed source of income from their capital.

However, growth industries, tailwinds and a profitable business model will attract competition. Large competitors are now thinking of entering the fray which could cause problems for Challenger.

According to an article in the AFR, $1.2 trillion global asset management business Standard Life Aberdeen is thinking about offering some sort of retirement income product. It may partner with superannuation funds to offer this.

Allianz and global fixed-income manager PIMCO have announced they will be setting up retirement income products.

Another is Magellan Financial Group Ltd (ASX: MFG), it is also apparently looking at the space.

Rising interest rates

Challenger’s success is linked to interest rates more than most other businesses. It has a huge amount of money allocated to fixed income investments which could deteriorate in value if interest rates continue to rise. All of the indicators and comments by the US Fed suggest that rates in the US will indeed continue to rise for the next year or two.

If rates rise in Australia and the US over the medium-term, will annuities be as popular if term deposit rates get back to a more normal level? It’s hard to say.

Foolish takeaway

Challenger is trading at 17x FY19’s estimated earnings. This isn’t expensive compared to the growth that it may achieve in future years, however it has traded at cheaper multiples in the past. I’m holding out for a price that puts it at 15x or 16x FY19’s estimated earnings.

For now, I’d rather add shares of this top business to my portfolio because of attractive value for the strong growth it’s achieving.

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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 Scott Phillips.

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