Why is the Challenger (ASX:CGF) share price outperforming this week?

Shares in the retirement-focused company are shifting higher…

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Key points

  • The Challenger share price is trading higher against the ASX All Ordinaries Index this week
  • The company achieved record sales in the first half of 2022
  • Challenger will pay an interim dividend of 11.5 cents per share (a 21% increase) 

The Challenger Ltd (ASX: CGF) share price is on a roll this week in what appears to be an upward trend.

Challenger shares are up 9% over the past five days while the S&P/ASX All Ordinaries Index (ASX: XAO) languishes, down 0.3%. Over the past month, the Challenger share price has risen 8.7% while the All Ords has dropped 3%.

Challenger's half-year results appear to have given further strength to the fund manager's stock. The share price gained 3% yesterday following the release of Challenger's report. The shares are in the green again this morning, up 0.15% to $6.75 at the time of writing.

Challenger announced it would pay a higher dividend following boosted profits and record sales for the first half of 2022 (1H22). It also told the market it anticipated continuing financial strength looking forward.

So, what does this mean for investors? Let's read on…

What did Challenger report?

The highlights of the company's financials for 1H22 are:

  • An interim dividend of 11.5 cents per share (up 21%)
  • Normalised net profit after tax (NPAT) of $166 million (also up 21%)
  • Assets under management totalling $115 billion (up 20%).

Looking closer at its main products, Challenger reported:

  • Life sales at $4.9 billion (up 44%)
  • Life book growth at $1.4 billion (up 8.4%)
  • Funds under management totalling $109 billion (up 20%)
  • Funds management EBIT of $45 million (up 28%).

Despite the COVID-19 challenges surrounding face-to-face meetings with clients, Challenger announced "record-breaking sales".

Challenger said its sales were "benefiting from an expansion in the institutional product offering". This includes the introduction of institutional term annuities and a growing institutional client base, along with low interest rates.

However, the company announced a slightly lowered cost-to-income ratio of 38.1% (against 39% as of 31 December 2020), and higher cash operating earnings for its life segment against the prior corresponding period.

Challenger said this was due to "additional costs associated with operating the Bank and increased costs to support business growth".

The company said its interim dividend was fully franked and aligned with earnings growth.

What's next for Challenger?

Overall, Challenger is confident that its financial strength will continue over the final half of 2022.

Running off the energy of its first half, Challenger aims to focus on retired customers, while maintaining product innovation and overall business momentum.

This follows the completion of Challenger's acquisition of MyLife MyFinance Limited (MLMF) in 1H22, with term deposits now on offer.

Challenger deems term deposits to be a critically important ingredient to the portfolios of retirees and pre-retirees. It's an important new offering for Challenger, given customers over 50 years of age accounted for 75% of sales in 1H22.

Smooth integration of the MLMF business into Challenger is on the agenda for the next half.

The company is also looking to develop its joint venture relationship with Apollo Global Management Inc Class A (NSYE: APO) in order to develop "a leading non-bank lending business in Australia and New Zealand".

While more details are yet to be provided on the strategy, a primary aim will be "enhancing the parties' retirement services offering in Australia".

What did management say?

Managing director and chief executive officer Nick Hamilton said:

As a clear leader in retirement incomes, and one of the fastest growing active funds managers in the country, complemented by the strategic acquisition of our new digital bank, Challenger has a unique opportunity to meet the needs of more Australians entering and in retirement.

In the first half of 2022, we delivered a strong result, deriving growth right across our business, diversifying revenue and focusing on the disciplined execution of our strategy.

We are well positioned to benefit from the greatest thematic opportunity of our time, retirement; we have a strong earnings base for growth in 2022 and beyond; and a highly capable and talented team who are committed to fulfilling our purpose of providing customers with financial security for a better retirement.

Challenger share price performance

Over the last 12 months, the Challenger share price has increased by 4%.

The company has a market capitalisation of $4.57 billion and a price-to-earnings ratio (P/E) of 9.1.

Motley Fool contributor Alice de Bruin has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Challenger Limited. 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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