Australia's retirement pool of assets called superannuation is one of the fastest growing in the world in percentage and numerical terms. Any company whose products are targeted at retirement and superannuation will likely have a strong tailwind for a very long time.
This is why I think Challenger Ltd (ASX: CGF), the annuity provider, is one of the best businesses on the ASX:
Demographics
The baby boomer cohort is starting to enter the retirement phase whilst having a large amount of assets. There will be a growing desire to have a comfortable and secure retirement, so they will want to transfer at least some of their capital into a reliable income product for the rest of their lives – which Challenger can provide.
The 65+ age bracket is expected to double over the next decade, so demand for annuities could soar in this time.
Strong growth and reliable balance sheet
Challenger reported that annuity sales were up 45% over the prior corresponding period in the second half of FY16.
Its balance sheet is in a strong position because Challenger allocates the majority of each annuity into fixed interest and cash investments, meaning its assets are safer than having a large allocation to shares or property. It is the investments in property and stocks that boost the profitability of Challenger.
Market leader
Challenger has grown its brand so that the public and financial planners alike recognise the company and know what it does. It's also one of the only providers offering a decent price on its annuities, which is why it is by far the market leader in the annuity market.
Rather than trying to compete with Challenger, other financial institutions are offering Challenger annuities under their own name with Suncorp Group Ltd (ASX: SUN) being one of the latest to sign up.
Foolish takeaway
I think Challenger could be one of the best stocks on the ASX over the next 10 years. It's trading at 17x FY17's estimated earnings with a grossed up dividend yield of 4.12% which is reasonable value and is a good price for long term Foolish investors.
Challenger isn't the only stock with a great future, you should also check out these great stocks.
