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FY21 result: The Challenger (ASX:CGF) share price is in focus

The Challenger Ltd (ASX: CGF) share price is on watch after delivering its FY21 result to the market.

Challenger is an investment management focused on providing customers with financial security for retirement. It is Australia’s largest provider of annuities.

What did Challenger report in FY21?

The annuity business said that its total group assets under management (AUM) grew by 29% to $110 billion.

Total annuity sales increased by 46% to $4.6 billion, whilst total life sales rose by 35% to $6.9 billion. A very solid year for annuity sales. The life book saw an increase of 14.4%.

FY21 funds management EBIT (EBIT explained) increased by 23%, supported by higher fee income and lower expenses.

But the growth in annuity sales wasn’t enough to stop the business seeing a sizeable fall in underlying profit.

Normalised profit before tax fell by 22% to $396 million. Normalised net profit after tax dropped 19% to $279 million.

But, including the investment returns that Challenger saw during the 2021 financial year, statutory net profit rose from a loss of $416 million in FY20 to a profit of $592 million.

A couple of Challenger’s key ratios went in the wrong direction. Normalised return on equity (ROE) – how much profit it makes on shareholder funds in the business – fell from 14.8% to 11.2%. The normalised cost to income ratio rose from 35.7% to 41.2%.

FY21 dividend increase

The Challenger board decided to increase the full year dividend by 14.3% to 20 cents per share. That’s a payout ratio of just under half of the normalised profit/earnings per share (EPS) which was 41.5 cents (which had fallen 27% in the year).

FY22 outlook and thoughts on the Challenger share price

Challenger is expecting to achieve strong profit growth in the new financial year, with a normalised net profit before tax of between $430 million to $480 million. The middle of that guidance range, being $455 million, would represent growth of 15%.

The company continues to target a dividend payout ratio of between 45% to 50% of normalised net profit before tax.

Part of its long-term plan for growth is to provide one in five Australian retirees with improved financial outcomes and to be the partner of choice for institutions and advisers, by 2030.

The acquisition of the bank MyLife MyFinance is an important part of this strategy and gives Challenger the opportunity to diversify its product offering further. It also accelerates the company’s plans to build relationships directly with customers.

At the pre-open share price, Challenger could be a decent option for income over the long-term with its dividend. However, I’m unsure about the company’s long-term profit potential, particularly with interest rates so low.

There are other ASX dividend shares I’d rather look at for income.

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At the time of publishing, Jaz does not have a financial or commercial interest in any of the companies mentioned.

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