Challenger Ltd (ASX: CGF) shares are currently trading at $8.70, far below their high of $14.42 back in late 2017. However, since the beginning of the year they are up over 7% and around 24% over the past 6 months.
So, why the volatility? And should you be interested in owning Challenger shares?
What does Challenger do?
Challenger is a member of the S&P/ASX 200 Index (INDEXASX: XJO), with a market cap of just over $5 billion. The investment management firm manages $84 billion in assets and operates 2 core business divisions: life and funds management.
Funds management division
Challenger's funds management businesses targets the accumulation or retirement savings phase – in other words, those who are currently saving and investing for their retirement. This is achieved through investment products in its 2 services – Fidante Partners and Challenger Investment Partners.
Fidante works with investment professionals to help create, grow and support boutique fund management businesses, while Challenger Investments works globally in fixed income and real estate investments as well as derivative strategies.
Life division
Challengers APRA-regulated life division provides for the next stage of life – retirement. This business is the largest provider of annuities and guaranteed retirement income solutions in Australia. These annuities are a stream of fixed payments to individuals (often retirees), giving them a steady reliable income.
How has Challenger performed recently?
Challenger has had a difficult couple of years. Interest rates declined and it saw a return to increased market volatility. It reported in the first half of FY19 a net profit after tax (NPAT) of just $6 million, which was down 97% on the prior corresponding period (pcp). However, in its most recent first quarter results it has re-affirmed its guidance for FY20 for NPAT of $500–550 million. This is roughly flat over FY19.
Challenger also reported a decrease in Australian annuity sales, however, total annuity sales were up 14% thanks to a 5 times increase in its Japanese annuities. These Japanese (MS Primary) annuity sales now represent 26% of total sales, up from 5% in the previous quarter.
Outlook
I like Challenger's outlook, given that the population aged over 65 is estimated to rise by 40% over the next decade. The vast majority of these people will retire or be looking to retire and many will look for a stable income.
There is also a change to the Australian Retirement Income Framework, which is set to be in place by 1 July this year. Here, the government is introducing a covenant that will require superannuation trustees to have a retirement income strategy in place for members. Challenger is welcoming this change and believes it will improve the standard of living for retirees by developing a retirement phase of superannuation.
Foolish takeaway
I believe these industry tail winds can see Challenger's annuity sales and funds under management grow materially over the next 10 years. Additionally, Challenger also offers an expected grossed-up dividend yield of 5.86% with a payout ratio of 45–50%.
