Nelnet Tops, Raises Dividend

Nelnet Inc. (NNI - Analyst Report) reported earnings per share of $1.09, excluding items, which surpassed the Zacks Consensus Estimate of $1.06 and improved from $1.01 in the prior-year quarter.

Nelnet benefited from diversification of revenue through fee-based businesses. Provisions for loan losses also witnessed a drop.

Concurrent to the earnings release, the company announced a 3-cent hike in its quarterly dividend to 10 cents.

On a GAAP basis, Nelnet reported first quarter net income of $54.9 million or $1.13 per share, slightly up from $54.3 million or $1.08 per share in the prior-year quarter.

Nelnet reported net interest income of $85.8 million in the first quarter, slightly up from $85.1 million in the prior-year. The drop in amortization of loan premiums and deferred origination costs was nearly offset by a decline in loan interest income and an increase in interest on bonds and notes payable.

Other income of $105.4 million was down 4.6% from the prior-year quarter. However, provisions for loan losses fell to $3.8 million from $5.0 million in the prior-year quarter.

Nelnet’s reported core student loan spread of 1.46% compared with 1.45% in the prior-year quarter. As of March 31, 2011, net student loan assets were $23.5 billion, down from $24.8 billion as of March 31, 2010. Historically low interest rates continue to provide prospects for Nelnet to generate substantial near-term value and cash flow from its student loan portfolio.

Nelnet is focused on increasing its earnings through diversification. Total revenue from fee-based businesses in the first quarter 2011 grew 1.9% year over year to $93.7 million. Revenue from tuition payment processing and the campus commerce business increased 11.4% year over year to $19.4 million. The company's enrollment services revenue increased slightly to $33.9 million from $33.3 million in the prior-year quarter. However, loan and guaranty servicing revenue dropped 2.1% year over year to $35.6 million.

Nelnet commenced servicing federally owned student loans for the Department of Education in September 2009. The company has experienced an increase in loans servicing and reported a growth in revenues from the servicing contract. As of March 31, 2011, the company was servicing $37.3 billion loans for 2.8 million borrowers on behalf of the Department, compared with $8.2 billion of loans for 1.1 million borrowers on March 31, 2010.

Nelnet’s operating expenses were $99.6 million, down 3.9% year over year. The company expects that over time operating expenses will increase to support revenue growth in its fee-based businesses.

Nelnet’s Board of Directors declared a second quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of 10 cents per share, up 43% from 7 cents paid in the prior quarter. The increased dividend will be paid on June 15, 2011, to shareholders of record at the close of business on June 1.

Similar to Nelnet, SLM Corp. (SLM - Analyst Report), better known as Sallie Mae, reported first quarter 2011 core earnings of $260 million or 48 cents per share, ahead of the Zacks Consensus Estimate of 41 cents. Favorable results were driven by a decrease in loan loss provisions and increased net interest income. The company also announced its first common stock dividend since 2007 and a $300 million share repurchase program.

Our Take

Although the student loan reform law has barred the company from originating federal student loans since July 2010, Nelnet has expanded in areas that are independent of the federal program. Increasing revenues from its fee-based business and servicing of loans for the Education department should support its earnings.

Though its capital position is solid, we believe that concerns over implementation of the recent financial reform act and a protracted economic recovery remain. Also, expenses are expected to increase with the rise in the volume of loan servicing. Yet, the dividend increase gives a boost to investors’ confidence in the stock.

Nelnet shares currently have a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

Read the full analyst report on NNI

Read the full analyst report on SLM