Challenger Limited (ASX: CGF) investors will receive their 17.5 cents per share (cps) dividend today – but is the ASX insurer's share price in the buy zone?
Challenger's dividend payday
Challenger's 17.5 cps fully-franked dividend is nothing to be sneezed at as the insurer is currently yielding 4.75% per annum.
The group is operating a dividend reinvestment plan (DRP) with no DRP discount, meaning investors can snap up more Challenger shares at $8.1695 per share (compared to the current valuation of $7.28 per share).
How has the Challenger share price performed in 2019?
The Challenger share price has fallen 20% so far this year after the company significantly downgraded earnings on the back of large portfolio losses on widening credit spreads and a Q4 2018 global equities downturn.
Challenger posted a 97% decline in half-year profit as it reported a net profit after tax of $6.1 million on 12 February 2019. Total annuity sales fell 7% on prior corresponding period (pcp) to $2.1 billion following a weaker Japanese result on the back of higher US interest rates.
Challenger did manage to increase its average funds under management by 9% to $77.4 billion in the half under its Funds Management segment, but overall the result was disappointing.
Where to now for the Challenger share price?
In my view, the biggest risk for Challenger is that management had a knee-jerk reaction to the Q4 losses and changed the company's investment mix.
While this might be the natural reaction to deteriorating market conditions, in doing so, Challenger could have in effect chrystalised its losses from Q4 2018 by not recovering these in the subsequent equity market rebound we've seen so far this year.
Challenger's long-term investment thesis remains sound and I think the recent decision by the Fed to halt monetary policy normalisation and quantitative tightening initiatives should help stabilise the group's full-year earnings result (depending on the current investment mix).
I still think the company's 34x earnings multiple might be a bit rich for me before seeing its full-year results in August, and I'd be checking out this buy-rated stock that could be set to take a new-age $22 billion by storm in the meantime.
