Is the Challenger Ltd share price a buy after its report?

The Challenger Ltd (ASX:CGF) share price declined after its report.

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The Challenger Ltd (ASX: CGF) share price has declined by 7% since it reported, is it a buy?

Challenger is Australia's leading annuity provider with a large market share and it's growing every year.

Management revealed its FY17 results earlier this week, here are some of the highlights:

  • Annuity sales up 20%
  • Average Group Assets Under Management (AUM) up 12%
  • Normalised earnings per share (EPS) up by 6%
  • Statutory net profit after tax up 32%
  • Normalised return on equity (pre-tax) increased from 17.8% to 18.3%
  • Cost to income ratio improved to 33.4%
  • Dividend up 6%

It's a good sign that every single one of the above numbers is an improvement on last year. I'm glad that both the normalised earnings per share and dividend increased at a decent rate.

Is it a good long-term buy?

Challenger has exposure to several good tailwinds.

The superannuation system is growing at a strong rate. The number of over-65s is expected to increase by 40% in the next 10 years and increase by 70% in the next 20 years. This should see a huge shift of assets into safe fixed-income products, such as annuities.

Challenger is increasing its distribution channels and next financial year it will be offered on AMP Limited (ASX: AMP) and BT Investment Management Ltd (ASX: BTT) channels.

Challenger is a great way to get exposure to the ageing demographics and retirement wealth pool. Advisers and clients are knowledgeable about what Challenger offers, which is a good sign for future growth.

Is it any good for income?

Challenger has a payout ratio of 50% of its normalised earnings per share, which I think is a healthy balance between rewarding shareholders and fuelling future growth.

It currently has a grossed-up dividend yield of 4.11%. This isn't the largest yield out there, but is a good option considering the future growth potential of the dividend.

Foolish takeaway

Challenger is currently trading at 16x FY18's estimated earnings. I think today's price is attractive for long-term investors planning to hold for more than five years.

I am already a shareholder and would like to add more to my portfolio, if the price drops 10% from here I'll be very interested.

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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