I think that Challenger Ltd (ASX: CGF) is one of the most attractive growth shares on the ASX at the moment.
Challenger’s main source of earnings is from selling annuities to retirees. It has a very promising future based on the following three reasons in my opinion:
Bigger addressable customer base
It seems that Challenger’s customer base is just going to get bigger and bigger over the coming years.
The number of people in retirement, people aged over 65, is projected to grow by 40% over the next decade and 70% over the next 20 years.
If Challenger can just hold its market share of annuities then it will steadily win more and more as a growing number of people want a guaranteed source of income for their money.
Bigger potential annuities
There could be more annuities, but the size of the annuities should grow over time too:
The mandatory 9.5% super contributions makes Australia’s retirement system one of the best in the world. Rising wages translates to bigger super contributions, which means a bigger pool of assets that can be turned into annuities down the line.
Compounding also grows the superannuation pot year after year. If super fund balances can continue to grow at 9% or 10% a year over the long-term then that’s more money to be turned into annuities.
Higher allocation of retirement assets to annuities
If Labor win and enacts their plans to crimp negative gearing and franking credits then annuities & fixed interest investments could become more popular. Australia has a very low level of investments allocated to fixed interest compared to the UK, USA and Canada.
Improved means testing and government laws requiring superannuation funds to offer guaranteed income could also increase the allocation of assets to annuities.
Challenger can win in several ways over the long-term. It’s not growing earnings at a crazy pace, but may be able to grow earnings by high single digits or low double digits for many years to come.
It’s currently trading at only 14x FY19’s estimated earnings with a grossed-up dividend yield of 5%.
Another growth share that looks very exciting for the next few years is this top stock which grew profit by 30% in FY18.
You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!
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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.