There aren't many shares on the ASX that I can say I think are truly market-beaters.
Challenger Ltd (ASX: CGF) is one of my favourite shares and one of the biggest positions in my portfolio.
Challenger has done very well for shareholders over the last year, five years and ten years (which includes the GFC), with the share price growing by 29%, 300% and 148% respectively.
I like Challenger shares for the following reasons:
Retiree growth
Challenger was predominantly a fund manager but has grown its business into the market-leading provider of annuities.
Annuities don't sound exciting and they're not meant to be. It turns a retiree's capital into a guaranteed source of income for the length of the annuity. Life annuities are gaining a lot of traction and are becoming popular for retirees who are worried about running out of money.
The amount of money being turned into annuities is expected to increase over the coming years for two main reasons.
The first reason is that the superannuation pool is growing at a strong rate thanks to mandatory contributions, voluntary contributions and a generous tax rate. The bigger the superannuation balance the bigger the annuity will be.
The other reason is that the number of people reaching retirement age is also growing. The number of people over 65 is expected to grow by 75% over the next 20 years.
Japanese growth
Challenger has developed a new line of potential growth by creating a commercial agreement with Mitsui Sumitomo Primary Life Insurance, which is the biggest provider of foreign currency annuities in Japan. Challenger is providing 20-year Australian dollar fixed rate annuities.
In FY17 Japanese annuity-related sales delivered 15% of sales for Challenger. I think this agreement could grow to be a big part of Challenger's earnings.
Growing dividend
The good thing about Challenger's steady and continuing growth is that the dividend has been growing too. In-fact, Challenger's dividend has grown every year since the GFC.
Challenger aims for a payout ratio of normalised profit of around 50%.
It currently has a grossed-up dividend yield of 3.52%.
Foolish takeaway
Challenger is currently trading at 21x FY18's estimated earnings.
Today's price definitely isn't cheap, but I'd rather buy Challenger shares than most of the other ASX100 shares. I will be looking to buy more Challenger shares if it goes back to around $11 in the next year or so.
