The best stock to own if student loans are forgiven
The cancellation of student loans was a hot topic at the start of Joe Biden’s presidency. Among the many potential beneficiaries is a small business in Lincoln, Nebraska, which could rake in more than $ 1 billion in cash flow if loans are canceled. Here’s how.
Nelnet (NYSE: NNI), a mini conglomerate based in Nebraska, owns $ 19 billion student loan portfolio. Thanks to the 1965 Federal Family Education Loan (FFEL) program, Nelnet’s student loan portfolio carries very little credit risk. The program established that if a borrower does not repay their student loans, the federal government is responsible for repaying at least 97% of the principal and interest to the lender.
Currently, Nelnet’s loan repayment period extends beyond 2030 and is expected to generate over $ 2 billion in cash flow based on Nelnet’s projections. Almost two-thirds of that cash flow is expected to arrive over the next five years if all goes according to plan. However, in the event that all or even part of the unpaid student debt was canceled, the federal government would assume the responsibility of repaying the lenders. This likely means that Nelnet would recognize some, if not most, of its cash flow much sooner than expected.
What would Nelnet do with the money?
Before we dive into the ways that Nelnet might allocate some of this potential money, it’s worth noting that if an event like this did occur and Nelnet received cash flow earlier than expected, it would be a one-time benefit. While this is unlikely to have a real impact on how much Nelnet is making, it could certainly affect the timeline. But it is okay. If interest income on Nelnet loans is deferred, the company could use that money to create value elsewhere.
The most obvious way to do this is to issue dividends or buy back shares, and Nelnet already does both. In the first nine months of 2020, Nelnet repurchased 1.6 million shares for approximately $ 73 million and increased its quarterly dividend by 10%.
Nelnet is also known to make money work in other ways. On January 26, Nelnet reached an agreement to acquire Catholic Faith Technologies (CFT) – a provider of software as a service training platforms for churches and other nonprofit institutions. Just three months before this acquisition, Nelnet also introduced Nelnet Bank in Salt Lake City, Utah. Launched with an initial capital of $ 100 million from Nelnet, Nelnet Bank should not lack lending power as it enters this new market.
Businesses in operation
In addition to its loan portfolio, Nelnet owns and operates several other subsidiaries which could no doubt benefit from additional investment capital. Nelnet reports two different types of income in its income statement: “loans” and “other”. Other income includes all income outside of Nelnet’s lending operations and is a large number for investors to watch. In the first nine months of this year, sales from other Nelnet activities continued to show strong growth, up 10% compared to the same period in 2019.
One of Nelnet’s many subsidiaries is a fiber optic cable company called Allo Communications, serving the Nebraska and Colorado markets. Running any fiber optic cable business requires large upfront investments, so with additional cash from Nelnet, Allo could accelerate its expansion and steal market share from its competitors.
In addition to Allo, Nelnet operates an educational software company called Nelnet Business Services (NBS). NBS provides a suite of services for schools and institutions, including payment processing, invoicing, administrative software, and more. In 2019, NBS generated $ 277 million in revenue and $ 47.3 million in net revenue by serving more than 11,000 schools in the United States.
While it may seem like there are plenty of places to spend fresh money, management always seems to know what to do with them. Since 2004, Nelnet has compounded the book value per share to 17.4% per annum. With this history of capital allocation in mind, a big salary for Nelnet would be great for shareholders.
Perhaps the most exciting part about Nelnet is how low it is priced. Despite an impressive increase in net earnings over the past year, Nelnet’s market capitalization, including cash and investments, is still only about 13 times its net earnings for the past 12 months. (But be warned, if you’re interested in exploring further – Nelnet shares are lightly traded, so use a limit order.)
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.