Commonwealth Bank of Australia (ASX: CBA) shares are a popular option for blue chip investors.
But given how expensive the big four bank's shares are following strong gains in recent years, the upside from here could be very limited.
Instead, investors might get better returns from the ASX 200 blue chip stock in this article.
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Which ASX 200 blue chip stock?
The stock we are going to look at today is annuities company Challenger Ltd (ASX: CGF).
Its shares may be close to a 52-week high, but the team at Bell Potter doesn't believe it is too late to invest. Especially given the release of a strong first quarter update. It said:
The quarterly updates, cover life new business sales, FUM flows and capital, adequacy. Life sales were up 4% year-on-year, helped by lifetime annuities and institutional fixed term annuities. Funds management FUM was weaker, down 3% for the quarter, with $2.3bn of positive market moves offset by $4.9bn in outflows. Challenger Life is strongly capitalised with a PCA ratio of 1.58 times.
Outside this, Bell Potter highlights that potential changes to rules from APRA could be a big positive for Challenger in the near term.
We discuss the illiquidity premium, noting the restrictiveness of the current rules, and consider some of the proposals being considered by APRA. We expect the new standard will allow a higher discount rate and will be more representative of the assets held – including longer dated corporate bonds and a wider range of issuers. The benefit should lead to a reduction in CGF's annuity liabilities (c$16bn at FY25) and could lead to a reduction to the $2.8bn of required capital, particularly asset charges (c$2bn) and stress scenarios (c$0.5bn).
Potential double-digit returns
According to the note, the broker has retained its buy rating on the ASX 200 blue chip stock with an improved price target of $10.25 (from $9.50).
Based on its current share price of $8.87, this implies potential upside of 15.5% over the next 12 months.
In addition, the broker is forecasting a fully franked dividend yield of 3.5%. This boosts the total potential return to 19%.
Commenting on its recommendation, Bell Potter said:
The medium term buy case is supported by both the freeing of capital from the APRA proposals and growth opportunities as Retiring Australians are offered advice and products to achieve an optimal retirement income. A small increase in the take up of annuities, with more favourable capital rules could dramatically increase the long-term growth of CGF. We expect positive news flow before the year-end. Despite a slightly mixed Q1, we increase our Target Price to $10.25/sh and maintain our BUY recommendation.
