Shares of Challenger Ltd (ASX: CGF) opened 6% higher today following the announcement of its full year results this morning.
In an announcement to the ASX, Challenger – Australia’s leading provider of annuities to retirees – reported a statutory profit of $299 million, down 12.2% year over year.
However, excluding some things which Challenger says help better reflect the underlying performance of the business over the long term (which I also think are reasonable), Challenger’s underlying earnings before interest and tax (EBIT) climbed 13% to $438 million.
“Challenger has again delivered strong operating performance with double digit earnings increases driven by AUM growth, stable Life margins and cost control…This is the third year in a row we have delivered a stable cash operating earnings margin, while our cost to income ratio has dropped 80 basis points to 33.8%, a new low,” CEO, Brian Benari, said.
The company’s board resolved to declare a final dividend of 15.5 cents per share fully franked, up 15% from a year earlier. This takes the full year payment to 30 cents.
Pleasingly, having already doubled the group’s payout over the past five years, Mr Benari says the company will now be in a position to pay fully franked dividends for the foreseeable future. “Challenger offers a rare combination: a strong growth proposition plus a track record of increasing dividends,” he said. Adding, “Subject to market conditions, we anticipate the ability to pay 100% franked dividends for the foreseeable future.”
Should you buy?
Looking ahead the Australian superannuation system is set to balloon as more people enter retirement, tax structures remain conducive to contributions, and mandatory employer contribution limits continue to rise. As Australia’s leading annuities provider and a rapidly growing manager of funds, Challenger stands to benefit significantly from this long-term tailwind.
Of course, it’s not a risk-free investment and investors must carefully scrutinise a company’s ability to price contracts and invest clients’ upfront capital at a return far superior to that which they are required to pay to annuities holders.
All things considered, however, Challenger appears to at least be deserving of a spot on long-term investors’ watchlists at today’s prices.
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Motley Fool contributor Owen Raskiewicz has no position in any stocks mentioned.
The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.
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