Why I'm holding onto my Challenger shares

I'm going to hold onto my Challenger Ltd (ASX:CGF) shares for the long-term, here's why.

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I'm going to hold onto my Challenger Ltd (ASX: CGF) shares for the long-term, despite the disappointing update yesterday.

If you didn't see it, Challenger said that it expects to reported normalised net profit before tax of $270 million in the upcoming half-year result. Some of the main contributors were lower cash distributions from Life's absolute return portfolio and Challenger also said there were lower management performance fees.

As a result of negative valuation movements, the Challenger statutory profit is expected to be $6 million for the half-year to December 2018. This included a $153 million decline in Life's investment assets.

Therefore Challenger reduced its FY19 guidance for normalised net profit before tax to be between $545 million to $565 million. If the result is somewhere in that range it would represent between a decline of 0.5% to growth of 3.2%. Those numbers aren't terrible, but it does represent a fairly sizeable decrease from the previous guidance of 8% to 12% growth.

Challenger's near-term growth prospects had also been reduced by the fact that the government delayed the 'MyRetirement' change until 1 July 2022.

It hasn't been a great year for Challenger, with the share price falling by 45%. A fall in asset values was always going to be a negative for Challenger's earnings in the short-term.

However, my investment thesis for Challenger was not based on what happened in FY18 or FY19, it was based on the growth to FY25 or FY30. So, a seemingly temporary setback doesn't alter my long-term thinking for Challenger.

Challenger is still exposed to the growing number of retirees, the slow-but-steady positive moves that make annuities seem more attractive to other assets and the growth of the superannuation pool.

Foolish takeaway

If you've been waiting to buy Challenger shares for a long time then this year could be the time to do it. I'm going to hold my shares and keep re-investing the dividend over the long-term because I still believe in its future – even more so at this lower price.

Motley Fool contributor Tristan Harrison owns shares of Challenger Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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