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How this market leader is cashing in on the ageing population

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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%
Franking: 100% 

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.

Written by Roger Montgomery

Roger Montgomery

Roger Montgomery is the chairman and CIO of Montgomery Investment Management.

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