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Challenger Ltd shares soar on blockbuster annuity sales

Retired couple

Shares in annuity seller Challenger Ltd (ASX: CGF) lifted more than 3 per cent in morning trade after the group revealed a normalised net profit of $362 million for the full year ending June 30 2016. The normalised profit is up 8 per cent over the prior year with total annuity sales of $3.4 billion lifting an impressive 22 per cent over the prior year.

Normalised earnings per share were up 6 per cent to 64.6 cents per share and the final dividend of 16.5 cents contributed to a full year dividend totaling 32.5 cents, up 8 per cent over the prior year.

Annuity sales going nuts

Challenger is a market-leader in providing popular retirement funding products and the group has a consistent track record of dividend and earnings growth. The booming annuity sales growth proves just what powerful tailwinds it enjoys in terms of Australia’s superannuation-rich baby boomer generation that is enjoying record life expectancies.

In the second half of the year annuity sales rocketed 45% over the prior corresponding half, reportedly thanks in part to new distribution agreements and superannuation industry moves that included Challenger annuities being placed on new investment and administration platforms.

The group also flagged five new annuity partnerships will be launched in the first half of 2017 and signed a deal with insurer Suncorp Group Ltd (ASX: SUN) this month to distribute Suncorp-branded annuities backed by Challenger through its national networks. Other deals already exist with the giant Commonwealth Bank of Australia (ASX: CBA) owned Colonial First State wealth management and administration business.

Accelerating sales growth and widening distribution networks are a happy confluence for investors and the group’s main challenges in the annuities space are around managing margins, costs, debt, and competition in what is a lucrative space for any dominant operator.

Funds Management

The funds management business also posted a successful year with average normalised FUM up 11 per cent and net flows amounting to $2.4 billion. This business has now achieved an impressive 11 consecutive quarters of positive organic flows despite some feeble performance from equity markets over the period. The continued success of this business is a bonus for investors, although the main game remains annuities.

Foolish takeaway

The outlook for annuities in Australia remains strong and Challenger looks in pole position to capitalise on this opportunity. At $9.50 the stock also remains on a reasonable valuation at around 15x trailing earnings with a handy trailing dividend of 3.3 per cent.

Risks remain around capital adequacy requirements and annuities margin compression as competitors create new products to help retirees fund their retirement with a reliable income stream in exchange for fixed lump-sum investments. Challenger is also probably benefiting from the dismal returns on cash in Australia today and a return to rising money market rates in Australia may also make its annuity products less appealing or threaten margins.

However, as I have written multiple times previously in my opinion the business looks a buy for investors looking for a smart way to play the ageing population and superannuation thematics.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

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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