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Why baby boomer wealth is sending the Challenger Ltd share price higher

The Challenger Ltd (ASX: CGF) share price hit a record high of $12.96 in morning trade and might have room to climb far higher over the next five years thanks to the (baby) booming growth of its annuity sales.

In fairness a lot of rubbish is written about tailwinds supporting different companies in the share market, which often means nothing if the company is no good or in a weak competitive position. However, Challenger is a rare company within the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) that has a genuine tailwind and market-leading position to harness it.

It sells annuities over fixed or entire life terms largely to the fast-growing baby boomer population that is Australia’s wealthiest segment of society.

Moreover, the amount of Australians that have grown rich via superannuation accumulation and property ownership entering retirement over the next 5-10 years is set to accelerate at a healthy rate for Challenger’s shareholders.

Thanks to its market-leading position and narrow moat Challenger is already boasting ballooning annuities sales growth.

Today it announced total annuity sales of $900 million for the quarter ending March 31 2017 were up an impressive 53% over the prior corresponding period (pcp), with lifetime annuity sales up 68% over the pcp.

The group is also benefiting from widening distribution networks in the large Japanese market and existing deals with Australian financial planning market leaders like AMP Limited (ASX: AMP) and Colonial First State as the wealth management arm of Commonwealth Bank of Australia (ASX: CBA).

These wide distribution networks alongside the onerous regulatory capital adequacy and funding requirements are what provides something of an earnings moat to Challenger, with a relatively benign competitive environment.

The group’s funds management business also posted a strong quarter with a $1 billion of fund inflows and total assets under management up 3%, thanks partly to the strength of equity markets over the quarter.

The only disappointment is that the group did not upgrade its profit guidance for the full year as it still expects cash operating earnings for financial year 2017 to come in at the mid-point for guidance between $620 million to $640 million.

At the time of writing shares are selling for $12.71 on around 19x analysts’ estimates for full year earnings per share of 66 cents, with an estimated full year dividend yield around 2.7%. Given its competitive strengths and powerful tailwinds I expect the shares will thump the market’s returns over the next five years and rate them as a buy.

If you want to do well in the share market over the next 10 years I would look to the companies best positioned to gouge Australia’s wealthy baby boomer population such as Challenger or private hospital operator Ramsay Health Care Limited (ASX: RHC).

While others like our top 3 ASX Blue Chips To Buy In 2017 offer investors the potential for big returns

For many, blue chip stocks means stability, profitability and regular dividends, often fully franked..

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The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

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Motley Fool contributor Tom Richardson owns shares of Challenger Limited and Ramsay Health Care.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Challenger Limited. 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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