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Challenger share price on watch after full year results and FY 2021 guidance

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The Challenger Ltd (ASX: CGF) share price could be on the move today following the release of its full year results.

How did Challenger perform in FY 2020?

For the 12 months ended 30 June 2020, Challenger reported a 4% increase in funds under management to $85.2 billion and improved Life sales across a more diversified base.

However, this was offset by significant negative investment experience relating to the COVID-19 pandemic market sell-off.

In respect to earnings, Challenger reported normalised net profit before tax of $507 million, down 8% on the prior corresponding period. This was in line with its guidance for the low end of its $500 million to $550 million range. This normalised result excludes investment experience and significant items.

Also on target was its normalised pre-tax return on equity (ROE). While it was lower year on year at 14.8%, it was 20 basis points above target.

On the bottom line, Challenger posted a normalised net profit after tax of $344 million, which was down 13%. On a statutory basis, the company reported a net loss after tax $416 million, reflecting significant Life investment experience losses from the pandemic-related market sell-off.

In light of the uncertain conditions, investment market volatility, and its intention to maintain a strong capital position while optimising earnings, the Challenger board has decided not to pay a final dividend in FY 2020. This means its interim dividend of 17.5 cents per share will be the only dividend it pays this year, down from 35.5 cents per share in FY 2019.

Managing Director and Chief Executive Officer, Richard Howes, commented: “While investment losses resulting from the major COVID-19 market event have impacted our net statutory performance, our strategy of growing funds under management and diversifying our revenue base demonstrates underlying business resilience.”

The chief executive appears optimistic that Challenger can overcome structural changes occurring in the wealth management market.

He explained: “Our domestic annuities sales continue to be impacted by structural changes to the wealth management market, and this year have been additionally affected by new age pension means test rules and the COVID-19 disruption. We are quickly evolving our business in response to the changes, and we are seeing positive signs that we are well positioned to rebuild momentum in the new market environment.“

FY 2021 outlook.

The annuities company is expecting its normalised net profit before tax to decline again in FY 2021. It has provided guidance for normalised net profit before tax in the range of $390 million to $440 million. This represents a 13.2% to 23% decline year on year.

This guidance assumes Challengers Life’s strong capital position will be prudently deployed over the course of the year, with the deployment of up to $3 billion in cash and liquids into higher returning investments. Management advised that this reflects an intention to maintain defensive portfolio settings and carefully manage expenses.

Challenger continues to target a normalised pre-tax return on equity of the RBA cash rate plus 14%. Though, it warned that its performance against this target is heavily reliant on the speed of capital deployment and market conditions.

And in respect to dividends, the company is maintaining its target normalised dividend payout ratio of between 45% and 50% and expects to return to paying dividends in this range when conditions allow.

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Motley Fool contributor James Mickleboro 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 Scott Phillips.

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