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%

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.

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