Challenger expects growth through Australia’s growing retirement income market

Shares tumble after the investment and retirement income group cuts its dividend payout ratio, which will ‘depend on growth and investment opportunities’.

Challenger expects increased demand from retiring Baby Boomers for a guaranteed income stream will create a significant growth opportunity for the retirement income giant.

Australia’s largest annuities provider forecast double-digit earnings growth again this financial year, but its shares tumbled after the company cut its dividend payout target.

Record sales of annuities, particularly in longer-dated and lifetime products, helped drive a 13 per cent rise in Challenger’s bottom-line annual net profit to $288m.

Chief executive Nick Hamilton said the result provided a strong platform as Challenger looked to capture a significant growth opportunity in Australia’s burgeoning retirement income market.

“Our superannuation system is forecast to triple in size over the next two decades,” he told analysts and investors on Tuesday.

“And while Australians are retiring in record numbers today, it remains the case that financial uncertainty in retirement is only worsening.”

Challenger’s normalised profit before tax rose 10 per cent to $521m, at the top end of the company’s guidance and slightly above the consensus analyst forecast.

Challenger forecast normalised pre-tax profit of $555m to $605m in the 2024 financial year, with the midpoint of that range representing an 11 per cent increase on FY23.

UBS analysts noted the midpoint is three per cent below market consensus.

But the reduction in Challenger’s dividend payout ratio target to 30-50 per cent from 45-50 per cent was a surprise, the analysts said.

Mr Hamilton defended the move, saying the previous range was extremely tight and the change provided capital flexibility should growth and investment opportunities arise.

“We are a balance sheet business, and as we look forward to support this very strong growth there may be opportunities to use that capital to support that growth,” he told The Australian.

The demand for guaranteed income drove “a real acceleration” in Challenger’s annuity sales, particularly in longer duration and lifetime products as customers sought to safeguard against the risk of running out of money in retirement.

Mr Hamilton noted the Baby Boomer generation will retire with more savings, after three decades of the superannuation guarantee scheme.

“We’ve got about six million Australians coming up to or in retirement, and that number only keeps getting larger and larger,” he said.

“Australians today are retiring, and will continue as the years pass, with higher and higher savings balances, and part of the intention there is clearly for them to provide income for retirement.”

Mr Hamilton said the highest interest rates in a decade for savers also drove the “exceptionally strong” demand for both term and lifetime annuities, noting a three-year annuity now offered 5.2 per cent compared to 1.4 per cent 18 months ago.

Sales of retail annuities in Australia jumped 53 per cent to $3.6bn, and overall annuities sales increased eight per cent to a record $5.5bn.

But total sales in Challenger’s life business were flat at $9.7bn, while its earnings before interest and tax rose 14 per cent to $541m.

Funds management EBIT fell 26 per cent to $62m due to lower average funds under management and higher expenses, although Challenger said investment performance remained strong despite challenging market conditions.

Challenger’s 12c final dividend takes the total for the year to 24c, up from 23c a year earlier.

After falling sharply in early trading, Challenger shares closed 2.8 per cent lower at $6.76.