The Challenger Ltd (ASX: CGF) share price is at a seven-year low. Challenger shares are trading for $4.78 at the time of writing – their lowest level since August 2013. It was only on February 20 that we were looking at a Challenger share price of $10.38 – which means that over the past month, the company has lost almost 54% of its value.
It's an incredible slide that likely has Challenger's shareholders questioning the future of this annuity provider. The company is now trading on a price-to-earnings ratio of just 7.08 and a trailing dividend yield of 7.43%.
Why Challenger shares have driven off a cliff
In my view, the most likely cause of this steep plummet in Challenger's share price isn't the coronavirus situation that's sinking the broader S&P/ASX 200 Index (ASX: XJO).
It's the cutting of interest rates by the Reserve Bank of Australia (RBA). This month, the RBA cut the cash rate to a new record low of 0.50%. More cuts are flagged as well in the coming months, as well as a potential RBA Quantitative Easing program.
Because Challenger is an annuity provider, it takes upfront deposits in return for guaranteeing a fixed stream of 'pension' income for its clients. Under normal circumstances, the company can make profits by achieving a higher rate of return on its deposits that what is required in annuity payments.
The only problem is that with a falling stock market and negligible returns on low-risk investments like cash and government bonds, there are very few avenues left for Challenger to make significant returns on this capital. Low interest rates exacerbate the latter problem, and so things are looking to get a whole lot worse from here.
In an ASX release two days ago, Challenger assured investors that "it remains well capitalised and is currently on track to achieve FY20 normalised net profit before tax within its guidance range."
Challenger CEO Richard Howes states that:
"Challenger is well placed to manage through the current market volatility. We have a strong capital position, a robust risk management approach, an experienced team and an excellent track record of delivering for our customers, shareholders and employees."
Are Challenger shares a buy at these prices?
I'm not convinced that there is too much upside in the current Challenger share price, despite the company's 'brave face'.
If interest rates go to zero and stay there for a long time, it's going to be very hard for the company to keep profits up. For deep value investors with a long-term mindset, there might be something here, but for me, I'm not quite willing to roll the dice.
