Is the Challenger Ltd (ASX: CGF) share price a buy as a defensive idea to protect against the coronavirus volatility?
Compared to a week ago, the share price of Challenger is down 4%, which is not as much as other fund managers like Magellan Financial Group Ltd (ASX: MFG), but it hasn't done any better than the general All Ordinaries (ASX: XAO) return over the past week.
So why could Challenger be a good defensive idea?
Interest rates remain low and investors still need to find a source of income from their capital.
Indeed, fixed interest type investments are seen and defensive and will provide consistent returns, which is what Challenger offers to its clients. A large amount of Challenger's investments are allocated to fixed interest investments on its balance sheet.
Just look at how Australian bonds have performed today. Vanguard Australian Fixed Interest Index ETF (ASX: VAF) is up 0.04% and Vanguard Australian Government Bond Index ETF (ASX: VGB) is up 0.04%. This could be good news for Challenger's bond investments.
From a shareholder perspective Challenger is trying to provide investors with a consistent dividend. It's looking to pay a dividend of 35.5 cents per share, which translates to a grossed-up dividend yield of 5.2% – this is solid yield in this era of low interest rates.
If the share market continues to be volatile then retirees looking for safe sources of income could decide that Challenger's annuities are even more attractive.
Is it growing?
In the recent Challenger half-year result the company announced that group assets under management (AUM) went up 10% to $86 billion and normalised net profit before tax rose 3% to $279 million.
As long as a business keeps sustainably growing then it could be worth holding in a portfolio. Challenger is now trading at 15x FY21's estimated earnings. It's not very cheap today, most of the last eight months would have been a better time to buy. But it could be a decent long-term defensive buy today.
