Challenger Ltd (ASX: CGF) is Australia's leading annuity provider, with a dominant market share of the existing annuities and it's winning an even higher percentage of the new annuities.
Simply being large doesn't mean that it's the best choice in the industry. As Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) have shown, being the biggest company in an industry isn't a guarantee of success.
This is why I think Challenger is a good growth idea for your portfolio:
Ageing population
Challenger's main client base is retirees who are looking to turn their capital into a guaranteed source of income.
The number of people over 65 is expected to increase by 75% over the next 20 years, which suggests that the number of interested clients could increase by 75% during that time. In-fact Australians have a lower percentage of its assets allocated to fixed income than most other countries, if it increased to a similar level then Challenger would benefit.
Superannuation
Australia has one of the most beneficial retirement systems in the world. The mandatory contributions of 9.5% of wages and the better tax treatment mean that people are motivated to make their super balances as big as they can, at least to $1.6 million.
As Australia's total superannuation balance grows it means that each annuity should be bigger due to contributions and compounding.
New government rules
The government recently implemented a rule in the budget that all superannuation trustees will have to offer Comprehensive Income Products for Retirement (CIPRs) that provide individuals with income for life, no matter how long they live.
Challenger could be a key beneficiary from this new rule because as I stated earlier, it's already a leader of annuity products. Challenger continues to expand its distribution network with new providers like AMP Limited (ASX: AMP).
Japanese growth
Challenger is also working with Japanese business MS Primary to provide Australian dollar 20 year fixed rate annuities. The Japanese annuities made up 3% of life sales in the second half of FY17 and 6% in the first six months of FY18.
Although this is not an important part of the thesis, it's a very useful bonus.
Foolish takeaway
Challenger is currently trading at 19x FY18's estimated earnings with a grossed-up dividend yield of 3.8%. It's not as cheap as it was before the budget, but I think it still offers good long-term value at the current price. However, interest rates could cause disruption over the next year or two, so there might be a better time to buy shares, in the $11s or lower.
