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Following the announcement of the completion of its long proposed strategic plan to split its operation into consumer banking and an education loan management business, shares of Sallie Mae (SLM - Analyst Report), formally known as SLM Corporation, plunged more than 60% on May 1. The stock closed the trading session at $9.02.

The company’s consumer business will operate with the name Sallie Mae and the existing ticker symbol. It will now be part of the S&P MidCap 400 index owing to its decreased size. Notably, the company mentioned in its 2013 annual report that after internal reorganization, there will be share distribution on a pro rata basis before the split. The share distribution is the actual reason for this significant price decline.   

What Led to the Split?

Sallie Mae, which specializes in education loans, was also the largest holder, servicer and collector of loans made under the Federal Family Education Loan Program (FFELP). At least 97% of the principal and accrued interest amount of the loan disbursed under FFELP are insured or guaranteed by state or not-for-profit organizations. However, the program was discontinued following a legislation  by the Congress in 2010, pursuant to the Health Care and Education Reconciliation Act of 2010 (HCERA).

Precisely, this legislation effectively removed federal subsidy to the company. Further, defaulting student loans, in the face of persistent unemployment and a sluggish economy, fueled the disappointing scenario. This has led Sallie Mae’s board of directors to take the decision to split it into 2 distinct publicly traded companies in May 2013.

We believe that Sallie Mae’s decision to split its operation was in order to separate its flourishing private student loan business from its declining government-backed loan servicing counterpart.

Consumer Banking Business

This new entity Sallie Mae will continue to operate the consumer banking business of the former company, focused on catering to private education loans, and providing saving and insurance products to students and families for higher education. Existing customers will be notified of any changes in due time.

Currently, the company’s private education loan portfolio is worth around $6.5 billion.

The Other Part

The loan management, servicing and asset recovery businesses will operate as another public listed company Navient Corporation (NAVIV). Notably, Navient has become a member of S&P 500.

Dividend

Sallie Mae, in its first-quarter 2014 earnings release on Apr 16, announced the suspension of its dividend payment on its common stock after the separation. However, Sallie Mae will continue to pay the preferred stock dividend.

Navient’s common stock dividend policy to be decided by its board of directors is expected to continue with Sallie Mae’s prior common stock dividend policy, which includes second-quarter 2014 common stock dividend of 15 cents per share.

What Lies Ahead?

Sallie Mae’s latest move could prove to be difficult for the company. Primarily it will face huge competition in the saturated banking space as a whole. We also remain concerned owing to several other issues including the ‘shrinking pie’ effect. Due to the split, the size of the business has reduced and consequently the large scale benefits will be missing.

Despite this negatives, Investors should keep in mind that Sallie Mae is poised to gain in the long run as it will thrive on its main operations, building core competency. Further, we remain encouraged on the company’s future growth prospects in terms of student loan business as the U.S. economy is showing signs of recovery with the unemployment rate gradually decreasing.
 
Sallie Mae currently holds a Zacks Rank #3 (Hold). Some better ranked stocks in the finance sector worth considering include Meridian Interstate Bancorp, Inc. (EBSB - Snapshot Report), Cash America International, Inc. (CSH - Snapshot Report) and Tree.Com, Inc. (TREE - Snapshot Report). While Meridian Interstate holds a Zacks Rank #1 (Strong Buy), both Cash America and Tree.Com carry a Zacks Rank #2 (Buy).

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