The Challenger Limited (ASX: CGF) share price charged 9.07% higher on the ASX yesterday as the Aussie annuities manager emerged as a potential takeover target in a key strategic announcement.
What did Challenger announce yesterday?
Challenger told the market that it has advanced its existing strategic relationship with MS&AD Insurance Group Holdings with the expanded deal set to commence on 1 July 2019.
Under the agreed terms, Challenger will commence a quote shares reinsurance of US-dollar-denominated annuities in the lucrative Japanese market by MS&AD's major subsidiary, Mitsui Sumitomo Primary Life Insurance Company Limited.
MS Primary would provide Challenger Life an annual amount of reinsurance, across both Australian and US dollar annuities, of at least 50 billion Japanese Yen (~$A$640 million) per year for a minimum of five years.
So, why did Challenger's share price surge 9% higher?
Challenger also announced that MS&AD intends to increase its stake in Challenger beyond 15% and seek a spot on the company's board, subject to regulatory and favourable market conditions.
This would put MS&AD in the box seat to pursue an acquisition of Challenger in the coming months or years given the strategic holding it would have after increasing its stake in the Aussie life insurance investment company.
Should you buy Challenger for its dividend or takeover prospects?
Challenger's 17.5 cps fully-franked dividend is nothing to be sneezed at as the insurer is currently yielding 4.75% per annum. That's marginally below the major banks but still in line with its fellow ASX insurers including the likes of Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG).
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'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).
Betting on M&A activity is always a risky play for growth investors, so I'd suggest checking out this buy-rated stock that could soar higher in a $22 billion market.
