Challenger Ltd (ASX: CGF) held its Annual General Meeting last week, reaffirming pre-tax earnings growth of between 8%-12% for FY2018.
There wasn't much new information to take away from the presentation, which is what you would expect given the company just provided its first quarter update for the new financial year on 17 October. Then, Challenger announced assets under management had increased by 5%, driven by strong results in Life and Funds Management.
Increasing assets under management (AUM) is a key profitability metric for investment firms and Challenger has been a strong performer in the sector of late. The group increased AUM by 17% to $70 billion in FY2017 and has had a strong start to FY2018.
Annuity sales have been a major contributor to this growth, as Australia's ageing population increasingly seeks the stable and predictable returns that annuity investments provide.
This trend is central to Challenger's growth strategy as the firm continues its expansion in the Japanese annuity market, through its relationship with insurer MS&AD Group. The partnership began in 2017 and has already yielded impressive results; accounting for almost 15% of Challenger's annuity sales for the year.
Additional avenues for growth exist in Australia as Challenger just last month launched its full range of annuity products via AMP Limited's (ASX: AMP) adviser portal. AMP is one of Australia's largest wealth management firms that will sell Challenger's products through its vast team of financial advisers.
Furthermore, Challenger expects to be up and running on BT Investment Management Ltd's (ASX: BTT) platform by the second half of FY2018. Challenger's annuities will then be available through two-thirds of Australia's financial advisers; providing broad exposure to the domestic market but still with plenty of room for further developments.
Another key characteristic behind Challenger's success of late is its scalability. Statutory net profit after tax increased 21% to $398 million in FY2017, while cost-to-income ratio decreased. This means that costs stay relatively stable even while revenues increase through greater assets under management.
Challenger also pays a growing, fully-franked dividend, prudently distributing around 45%-50% of earnings as it continues to strengthen the balance sheet and maintain APRA's capital requirements.
Foolish takeaway
I believe Challenger is one of the best financials listed on the ASX today, enjoying strong growth tailwinds and a profitable business model. Quality companies such as these rarely appear cheap, so I recommend potential investors remain patient and take advantage when temporary share price weakness exists.
