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Is the Challenger share price a buy?

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.

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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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