Is the Challenger Ltd (ASX: CGF) share price a buy?
The Challenger share price has fallen 37% over the past year, is it a buy? The annuity leader of Australia has a number of attractive tailwinds.
For one, the key customer group for Challenger's annuities is retirees because they are looking for a secure source of income from their capital.
The number of retirees is expected to grow by 40% over the next decade and 70% over the next two decades.
Challenger is also exposed to the growth sector of superannuation with Australians contributing a large amount of money to the retirement pool every year.
The company is a clear market leader in the annuity space, it wins around 90% of new annuity business.
However, I have been considering selling shares and moving the money elsewhere because of two new-ish reasons.
Falling interest rates might make annuities less attractive to potential customers because the rate is not much better than a term deposit. Customers may want to look higher up the risk spectrum for stronger returns. Therefore, Challenger's Life book may not grow as fast as I was hoping when I first invested in Challenger a few years ago.
I'm also becoming wary of what new competition might do in the sector. There has been talk for a while that, for example, Magellan Financial Group Ltd (ASX: MFG) may come out with its own annuity-style offering. Competition isn't a dealbreaker necessarily, but it may lower potential returns.
The final problem is that with lower interest rates it becomes harder for Challenger to generate long-term strong returns with its assets under management (AUM).
Foolish takeaway
Challenger is currently trading at 12x FY20's estimated earnings with a grossed-up dividend yield of 6.4%. Challenger is trading a lot more attractively compared to a year ago, but I'm also less certain about its long-term outlook.
