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.