Challenger Ltd & Invocare Limited: 2 stocks to win from the aging population

The ‘average’ Australian is getting older every year as more people reach retirement age. This presents problems and opportunities as investors.

Where will retirees spend their money?

What services are going to be increasingly used?

The total Australian workforce may dip over the next 10 to 15 years, but there are businesses out there that will see increased activity.

Challenger Ltd (ASX: CGF)

Challenger is Australia’s dominant provider of annuities with a market capitalisation of $6 billion. The investment world can be an uncertain landscape for retirees, but Challenger can provide that certainty with its products.

Financial planners and retirees alike are loving annuities, in its FY16 report Challenger disclosed that annuity sales were up 45% in the second half of the year over the prior corresponding period. This big boost to sales also helped grow normalised earnings per share by 6% and the dividend by 8%.

I think Challenger has a lot of growth left in it because the baby boomer generation has at least another 15 years before the youngest members retire.

There is also a chance that it becomes law that a part of a retiree’s superannuation must be turned into an income producing product. Challenger is the current market leader, a law change would give it a huge boost.

Challenger is trading at 16.5x FY17’s estimated earnings with a grossed up dividend yield of 4.29%.

Invocare Limited (ASX: IVC)

Invocare is a fairly morbid investment as it’s the dominant funeral operator of Australia with a market capitalisation of $1.4 billion.

It has around 33% market share of funerals in Australia with its stable of brands including White Lady, Value Funerals and Simplicity Funerals.

Invocare has been a solid investment for shareholders over the last 10 years, its share price has grown by 138% and it has increased its dividend every year in that time.

According to the Australia Bureau of Statistics, the number of deaths in Australia is expected to increase at a faster rate every year until 2034. Not many businesses on the ASX can point to that long of a growth runway.

Invocare also recently expanded into the USA. Its operations there are very small at the moment, but America’s population is large compared to Australia’s. Invocare may not be the fastest grower on the ASX over the next 10 years, but it will be one of the most reliable.

It’s trading at 24.3x FY17’s estimated earnings with a grossed up dividend yield of 4.3%.

Foolish takeaway

Sometimes it’s hard to know when a business will have a good year, or where the share price will go over the short to medium term. However, it is possible to identify businesses with long tailwinds that should help them grow for many years to come, like Challenger and Invocare.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and InvoCare Limited. 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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