AMM Dividend Letter Issue 1 ~ SLM Corp: Upcoming Spinoff To Unlock Value
This is from the AMM Dividend Letter released October 31, 2013. If you want to see the latest “Dividend Stock in Focus” as soon as it’s released then join our mailing list here.
SLM Corporation (SLM): $25.37**
SLM Corp. (also known as Sallie Mae) operates two distinct businesses related to the student loan industry: 1) Consumer Lending: originates, acquires, finances and services private student loans, and 2) Government Guaranteed Loans: manages a portfolio of private loans guaranteed by the government through the Federal Family Education Loan Program (FFELP). While the FFELP program was terminated in 2010, SLM Corp. continues to manage a FFELP loan portfolio of more than $118 billion on its balance sheet. Additionally, the company services loans owned by the Department of Education, and other guarantors of Federal Family Education Loan Program (FFELP) loans.
From 1988 through 2006 SLM Corp. grew their dividend at a compound annual rate of 22% with only one annual reduction of the payout during the 2001 recession. However they reduced the dividend in 2007 and then eliminated the dividend completely from 2008 through 2010 as a result of the financial crisis. In 2011 they reinitiated a dividend of 30 cents per share and increased this amount by 66% to 50 cents per share in 2012.
Catalyst for dividend growth and price appreciation:
Earlier this year SLM Corp. announced that it will be spinning off its high growth, high return on equity private education loan business while the parent company will retain and manage its large student loan portfolio. The private bank, the spin off, will be named Sallie Mae Bank. The parent company will change its name to Education Loan Management. Splitting the company in two via a spinoff is a classic value creating strategy. Conceptually, the parts should be worth more than the whole, since investors can now value the high growth business independently of the operating performance of the slower growth business. The spinoff is expected to occur sometime in calendar year 2014. We outline the attributes of each post spinoff business below:
Education Loan Management (predictable cash flows, consistent return of capital to shareholders):
This entity will manage the cash flow from a student loan book that will amortize in 20 years and will remain the largest education loan servicer in the country. After accounting for operational expenses and discounting back the expected and reliable cash flows for the next 20 years we arrive at a value of $25 per share for Sallie Mae’s student loan portfolio. Ultimately, we expect Education Loan Management to return more capital to shareholders via share buybacks and dividends after the spinoff is completed. The potential exists for the value of Education Loan Management to increase if they are able to acquire more blocks of federally guaranteed student loans.
Sallie Mae Bank (high growth, high return on equity):
Sallie Mae Bank will retain the most recognized brand in the education loan industry, along with a leading market share (~47%) in private loan originations. We estimate the private bank business (the spinoff) is worth between $5-7 per share based on a comparison to similar publicly traded companies.
Based on our valuation analysis, the combined value of the two entities following the spinoff could be as high as $32 per share. Our 1 year total return target for this holding at time of our purchase was 25-30%***.
** Price as of October 31, 2013
*** Represents average price paid for clients invested in our Dividend Strategy. Depending on when a client joined the strategy they may have received a different price.