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Challenger delivers record profit, dividends

Nicholas Grove  |  16 Aug 2016Text size  Decrease  Increase  |  

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The annuity provider posts a record annual profit and dividend, boosted by the superannuation industry including Challenger products on investment and administration platforms.


Challenger Limited (ASX: CGF) on Tuesday announced an 8 per cent rise in normalised net profit before one-off items to $362 million for fiscal 2016, on the back of a 22 per cent rise in annuity sales to a record $3.4 billion.

The Australian superannuation industry moved to include Challenger annuities on investment and administration platforms over the year, with sales accelerating in the second fiscal half, up 45 per cent on the prior corresponding period.

Normalised earnings per share (EPS) were up 6 per cent to 64.6 cents a share, with earnings from higher normalised net profit partially offset by a higher share count, the company said in a statement to the ASX.

The profit and EPS results were just short of Morningstar's expectations of $368.3 million and 59.6 cents a share, respectively.

Normalised return on equity was down slightly to 17.8 per cent pre-tax, which Challenger said was due to the impact of Brexit and market disruption affecting earnings from Fidante Partners Europe.

Challenger announced a final dividend of 16.5 cents a share, contributing to a full-year record dividend of 32.5 cents, up 8 per cent and in line with Morningstar's forecast.

"With strong annuity sales growth and earnings margins held flat, Challenger is beginning to reap the rewards of its investments to capitalise on long-term opportunities as the retiree market grows," Morningstar equity analyst Nathan Zaia said.

"Challenger is yet to feel any meaningful negative impact from the low-interest-rate environment as demand for annuities continues to rise, and to date Challenger has been able to pass on lower returns it makes on investments by offering lower returns on the annuities it sells.

"New distribution agreements are already beginning to bear fruit, and in addition to favourable demographic trends, we believe they will support continued annuity sales growth."

Challenger CEO said the company is generating superior shareholder returns through a "highly efficient, profitable and sustainable model".

"In our Life business we have been able to maintain consistent margins for the past four years, which means the growth opportunities we are capturing feed directly through to our earnings and higher shareholder dividends," he said.

"The bottom line is that more retirees are buying Challenger annuities because they better understand retirement risk and seek guidance from advisers who rate us highly and can access our products much more easily from a growing range of platforms."

Looking at the company's guidance for fiscal 2017, Benari said the main Life division is targeting normalised cash operating earnings in a range of $620 million to $640 million, compared to $592 million in fiscal 2016.

"Challenger continues to target a normalised return on equity of 18 per cent pre-tax and expects to maintain a fully franked dividend payout ratio of 45 per cent to 50 per cent of normalised profit, subject to prevailing market conditions," he said.

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Nicholas Grove is a Morningstar journalist.

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