How this market leader is cashing in on the ageing population
Key statistics: ASX: CGF
Closing share price 24.10.17: $13.370
52-week high: $13.820
52-week low: $9.730
Most recent dividend: 17.5c
Annual dividend yield: 2.56%
Challenger Limited (ASX: CGF) has a habit of under-promising and over-delivering.
Early supporters of the stock have enjoyed a share price increase from around $3 five-years ago to about $13 today.
Shares in Challenger are up after the group released a positive trading update for the quarter ending September 30, 2017.
Challenger is the clear market leader in Australia selling annuities, a security that provides the investor with a guaranteed income stream for a period of time that can be both defined or unlimited (lifetime).
We believe Challenger is a strong company for several reasons:
- The fundamental drivers are very strong with an ageing population looking for a secure income stream in retirement.
- Regulatory changes that are due to be introduced will most likely benefit annuities.
- Challenger's market position is very strong and, although we do think there will be additional competition in the future, we believe the company has built a strong moat around itself and will be able to continue to grow very strongly for quite some time to come.
- Although valuation is not cheap, we see low risk for disappointment in its sales or operations as it is a well-run company with a good management team.
When Challenger reported its full year results a few of months ago, it released guidance that the market took as a disappointment and sent the shares down by 8% over a couple of days.
The share price has recovered most of the fall since and was only down 3% from the pre-result level before it released its trading update last week.
On October 17, the company reported a trading update that took the market a bit by surprise and sent the share price up 5%.
It is now becoming clear that the company was very conservative in its guidance - which we applaud as it is much better to under-promise and over-deliver - as it has already, after three months trading, built quite a bit of buffer to meeting the guidance for the full year.
The Montgomery Funds own shares in Challenger.
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