The finance industry is one of Australia's best and most profitable sectors. However, there's more to it than just the big four banks like Commonwealth Bank of Australia (ASX: CBA).
Here are three of my favourite ideas in the finance industry:
Challenger Ltd (ASX: CGF)
Challenger is Australia's leading annuity provider. The business has had a great decade since the GFC and I believe it could have another great decade ahead.
Its main client segment is retirees looking for a guaranteed source of income from their capital. The number of over-65s in Australia is expected to increase by 75% over the next 20 years. If the government make annuities a key feature of retirement then Challenger could be a big winner.
Challenger is currently trading at 18x FY18's estimated earnings with a grossed-up dividend yield of 4%.
Magellan Financial Group Ltd (ASX: MFG)
Magellan has been a standout performer for investors looking for overseas diversification. Shareholders have really benefited from how much capital inflows the fund manager has received.
Management could continue growing management fees nicely with the launch of the Magellan Global Trust which should be listed on the ASX soon. Magellan updated the market yesterday to say that it had raised $1.55 billion of funds for the Magellan Global Trust.
Magellan is currently trading at 22x FY17's earnings with a grossed-up dividend yield of 4.8%.
Pepper Group Ltd (ASX: PEP)
Pepper is one of Australia's largest non-bank lenders and is also growing overseas.
People are happy to go with the best deal they can find, particularly with the growth of mortgage brokers like Mortgage Choice Limited (ASX: MOC) which allow people to choose from dozens of options. Pepper is benefiting from this trend.
Its overseas operations may not be large yet but it could turn into a sizeable part of the business in time.
Pepper is currently trading at 10x FY16's earnings with a grossed-up dividend yield of 3.28%.
Foolish takeaway
All three of the above businesses are good businesses and I'd much rather own them than most banks. At the current prices I would go for Challenger because of how much its target market demographic and the superannuation pool will grow in the coming years.
