Are Challenger shares becoming a top ASX dividend pick?

Challenger Ltd (ASX: CGF) shares are proving to be an appealing pick for dividends.

This business is the largest annuity provider in Australia, allowing retirees to turn capital into a guaranteed source of income.

Regaining its dividend status

The company has increased its dividend each year since the COVID-19 cut in 2020.

COVID-19 saw a lot of businesses cut their payouts, but Challenger has recovered well from that difficult year.

The Challenger FY24 first-half result saw the business grow its interim dividend by 8% to 13 cents per share.

That result, being the first six months of FY24, saw normalised net profit before tax (NPBT) growth of 16% to $290 million, while assets under management (AUM) grew by 18% to $117 billion.

Annuity sales are seeing strong growth – life sales amounted to $5.3 billion, with “very strong” lifetime annuity sales of $1.1 billion – up 190%. There were new business annuity sales of $1.9 billion, up 19%.

The projections on Commsec suggest the dividends can continue to grow in FY24 (25.1 cents per share), FY25 (27 cents per share) and FY26 (29 cents per share).

That means the grossed-up dividend yield could be 5.3% in FY24, 5.7% in FY25 and 6.1% in FY26.

Can growth continue?

We can’t know for sure what’s going to happen, particularly with an ASX financial share like Challenger that can be impacted by market crashes.

However, the higher interest rate environment is improving the appeal of annuities as they now offer stronger returns. Challenger’s products are attracting a lot of fund inflows.

In the FY24 first-half result, it reaffirmed its FY24 normalised net profit before tax guidance, which is now expected to be in the top half of its $555 million to $605 million guidance range.

If its group AUM keeps increasing, then this gives the company the potential to earn stronger underlying profit.

Ageing demographics and growing superannuation balances are pleasing tailwinds to help Challenger’s annuity sales in the future.

According to the estimate on Commsec, the Challenger share price is valued at under 13 times FY24’s estimated earnings.

Dividends aren’t guaranteed, but the ASX dividend share is building an appealing payout history.

The post Are Challenger shares becoming a top ASX dividend pick? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Challenger. 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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