The Challenger Ltd (ASX: CGF) share price has been a winner over the last year, growing by 19%.
Challenger is the market leader in selling annuities and other similar products in Australia. Most investors either love or hate Challenger, here’s why you could be in either camp:
Challenger’s main focus is selling annuities to retirees who want to receive a guaranteed source of income from their capital. In its latest update for the three months to 31 March 2017 it reported that annuity sales were up 53% over the prior corresponding period.
Challenger’s sales could keep growing at a rapid rate due to the avalanche of baby boomers that will be reaching retirement age over the next decade, as well as the growing acceptance of annuities among advisers and clients alike.
The business has also started issuing 20-year Australian dollar fixed rate annuities to Mitsui Sumitomo Primary Life Insurance, which could provide a sizeable chunk of earnings in a couple of years.
Challenger’s long-term success will be down to how successfully it manages its funds under management and how well it forecast the life expectancy of its clients.
If clients live longer than expected then Challenger will have to make up that shortfall, which would hurt shareholders. However, this won’t be known for many years.
The short-term risk to Challenger is the unpredictability of the share market. As a financial stock a lot of its assets are in shares, so a drop in the market can hurt Challenger’s share price more than most, such as in February 2016 when it dropped to $6.62.
Personally, I think Challenger will be a long-term winner and it’s certainly my favourite financial business on the ASX.
It’s currently trading at 20x FY17’s estimated earnings with a grossed-up dividend yield of 3.59%, which I think is good value, even after the large rise in the share price over the last year.
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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. 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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