One investment opportunity in the news recently as a result of the renewed regulatory drive to shake-up retirement products is Challenger Ltd (ASX: CGF).
In fact shares nudged a record high of $7.95 today as investors bet that the popularity of its annuity products will increase thanks to regulatory support as a result of the Murray Inquiry and the ageing population.
Challenger also has the GFC to thank for the popularity of its retirement products, as a whole generation of burnt baby boomers would still rather stick their cash under the bed than go anywhere near the share market.
Indeed much of the advertising for its annuity products is about the risks of equity markets, rather than the benefits of annuity products. However, it's understandable that many people in retirement are happy to accept a guaranteed income even if it means lower returns as long as they don't have to worry about the volatility of share markets, and therein lies Challenger's opportunity.
The business posted a normalised net profit of $334 million in the last financial year, which was flat on the prior year, but its annuity sales continue to grow strongly.
For the first quarter of FY16 annuity sales were $884 million, up 12% over the prior corresponding period, with the ageing population a strong tailwind for the market leader to harness.
Challenger also has a substantial funds management business with $53.5 billion of funds under management. This means it has leverage to capital markets and equity markets in particular as revenues are often derived as a percentage of total funds under management.
Analysts' forecasts are for earnings per share in the region of 60 cents for the year ahead which places the group on around 13.5x estimated forward earnings. The group also pays a handy dividend in the region of 3.75% on a trailing basis with expectations for a steady lift in dividends out to 2018.
Overall, Challenger looks one of the better opportunities amongst financial services business on the ASX, alongside Macquarie Group Ltd (ASX: MQG) and even the big banks like Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) at current valuations.
