Is the Challenger Ltd (ASX: CGF) share price in the buy zone right now?
It certainly was yesterday for many investors. Challenger shares topped the ASX leader boards as trading started for the new week, posting a 13.87% gain to finish the day at $10.10 per share.
Today, Challenger shares are consolidating and are down 0.4% at the time of writing at $10.06 a share. On Monday, Challenger shares were asking just $8.83 at market close.
Why are Challenger shares hitting the roof?
It was all about the FY20 half-year results that the company released before market open yesterday. Challenger reported assets under management growth of 10% to $86 billion and a 3% rise in net profits before tax to $279 million. The company kept its dividend payments steady, which gives Challenger a trailing yield of 3.51% on current prices.
It's somewhat a return to the glory days for Challenger, who saw its share price plummet in recent years from over $14 in late 2017 to a low of $6.22 mid last year.
Recent record low interest rates have thrown a few spanners into Challenger's business model, which is what has had the market so worried about the company.
Challenger sells annuity products, which function similarly to pensions for retired people. If Challenger takes customer deposits from annuities with the promise of a 4% return, it can then invest the money and collect anything over 4% as revenue.
Low interest rates have meant that 'safer' investments like government bonds and term deposits that Challenger would prefer to invest in are yielding far less than 4%. This means that the company is probably being forced to seek more returns in the much riskier share market.
The recent results indicate Challenger has found a solid and profitable middle ground in this venture (at least for now). This, in turn, has allayed the market's concerns and (in my opinion) resulted in the share price appreciation we have seen this week.
Are Challenger shares a buy?
I think this company offers a good long-term investment. Demand for the kinds of products Challenger provides is likely only going to increase as our population ages and investors look for income security in retirement.
Saying that, I found the Challenger share price far more appealing at last week's levels. Low interest rates remain a concern for me – I don't know how a hypothetical future stock market crash will affect the company's assets and profitability.
Challenger remains a solid hold for me at the current prices.
