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Major shareholder believes Challenger Ltd (ASX:CGF) share price is a buy

The Challenger Ltd (ASX: CGF) share price is down around $1, or 7.5%, since the high in May last month. One of Challenger’s largest shareholders seems to believe that the current share price is worth a buy.

Caledonia (Private) Investments Pty Limited already owned 11.5% of Challenger’s shares and then on 14 June 2018 added almost another seven million shares, bringing its holding up to 12.63%. The price last week was very similar to yesterday’s price.

Challenger is Australia’s market-leading annuity provider. It turns a retiree’s capital into a guaranteed source of income. It’s expected to have a good future because the number of retirees is projected to increase by 75% over the next two decades.

The size of the annuities is expected to continue growing as well because of Australia’s 9.5% mandatory superannuation contributions and the effect compounding over time.

Another reason for possible outperformance in the future by Challenger is that the amount of retiree money allocated to fixed income assets like annuities is quite low in Australia compared to other countries. But that percentage could be about to become bigger.

The government recently announced in the budget that superannuation trustees will be required to offer comprehensive income products for retirement (CIPRs) that provide individuals with income for life, no matter how long they live. This could be a big push towards people taking up lifetime annuities.

Challenger is not a fast-growth stock, but it is steadily increasing its profit every single year as a bigger flow of funds head towards the annuity provider.

Foolish takeaway

The Challenger share price could suffer from volatility over the next year or two from rising interest rates, however I believe that in a decade from now it could be a significantly larger business.

It has a conservative dividend payout ratio of 50% of ‘normalised’ profit and is currently  trading at 17x FY19’s estimated earnings. I’m personally waiting for a better buy price, but I can understand why Caledonia wanted to buy more last week.

Until Challenger is trading cheaper, I’m looking to buy these exciting shares.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. 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 Scott Phillips.

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