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3 shares to profit from the wealthy baby boomers

Maybe, like me, you’ve spent the last few years watching your beloved relatives grow to an almost impossibly healthy old age. Your email inbox and Facebook feed are regularly flooded with badly composed photos from some other sun-drenched location – smiling parents reporting back from the Mediterranean, or warm Caribbean seas, or yet another caravan park.  

And with each photo and Facebook update, you can feel your inheritance drying up. Don’t they realise their recent safari in Kenya cost you a kitchen renovation? It’s just rude, isn’t it? You thought old people were meant to just stay home and drink prune juice – and meanwhile they’re out enjoying their lives 

Surely there is some way that you could benefit from your parents’ stubborn longevity and still afford that new kitchen you always dreamed of. Well, an investment in one of these three companies could be the answer. It might even help take some of the tension out of the air the next time your parents invite you over for a slideshow of their holidays.

  1. Challenger Ltd (ASX: CGF)

Challenger is an investment management firm that specialises in annuities.   

Many people cash out their super fund in one lump sum when they hit retirement, and decisions on how to manage this capital can be stressful.  

An annuity provides a guaranteed steady source of income into old age. This allows retirees to budget more effectively throughout their retirement. 

Challenger had a great FY17, with its assets under management increasing 17% on FY16 to $70 billion and statutory NPAT up 21% to $398 million. Annuity sales were up 20% to $4 billion for the year. 

The company’s outlook for FY18 is for growth in normalised net profit before tax of between 8% and 12%. Given FY17 growth in NPBT was 8%, this shows that the company is optimistic about its future. 

Challenger’s share price is up around 20% over the last 12 months to $14.03. 

  1. Estia Health Ltd (ASX: EHE)

Estia Health is one of the largest providers of aged care services in Australia. As life expectancy increases and a greater proportion of the nation’s population moves into old age, demand for this sort of healthcare can only increase. 

There are a number of aged care providers in Australia, but Estia seems to be the pick of the bunch right now. 

Shares in Estia Health Ltd have vastly outperformed rivals Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG) over the last 12 months. They have surged over 30% to $3.52, while Japara’s shares have fallen about 12% to $1.97, and the Regis share price is down 24% to $3.63. 

The market rewarded Estia for delivering the best financial results out of the three companies. Estia’s FY17 NPAT rose 47% to $40.7 million and they halved their net debt through a successful capital raising of $136.8 million. By contrast, Regis’ NPAT rose just 8% to $61.1 million, while Japara’s NPAT actually fell 2.3% to $29.7 million. 

Looking at its P/E ratio relative to its peers doesn’t seem to indicate that Estia’s shares are that overbought either. Both Japara and Regis trade at a little under 18x earnings, whereas Estia is only slightly higher at 19.5x. Now could be an ideal opportunity to invest in a growing company at a reasonably fair price. 

  1. Invocare Limited (ASX: IVC)

This one is a little morbid, but it still deserves to be included on the list.  

Invocare operates funeral homes, cemeteries and crematoria in Australia, New Zealand and Singapore. They own a number of well-known brands, including White Lady Funerals. 

An ageing population means that death rates are also going to increase. So an investment in Invocare is almost like holding life insurance on the population. 

Invocare delivered strong results in its first half FY17 results (it reports on a financial year ending December 31). Net profit was up 50.1% on 1H16, but this was primarily driven by increased returns on prepaid contract funds under management.

These are prepaid funeral expenses that Invocare keeps in trust and invests in equities, fixed income and property. One side effect of people living longer into old age – longer than even they themselves anticipated – is that these prepaid expenses will sit on Invocare’s balance sheet for longer, giving the company increased opportunity to earn returns on them. 

In 1H17, a big boost came from positive revaluations of property Invocare was invested in, and it will be interesting to see whether a similar feat can be repeated in 2H17.

However, relying on shrewd asset allocation as a key source of income will most likely add increased volatility to earnings. This may dissuade some more risk-averse investors who would rather Invocare focussed on their core business rather than branching out into funds management. 

Invocare’s share price is up 14% over the last 12 months to $15.82. 

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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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