Sallie Mae Ups Buyback by $400M

SLM Corp. (SLM - Analyst Report), commonly known as Sallie Mae, remains committed to boost investors’ wealth. Yesterday, the company announced the authorization of $400 million for share buyback activities revealed in January. This is in addition to the $500 million which was authorized at that time.

The buyback program has no expiration date. Sallie Mae has already bought back 16.7 million shares of common stock for $268 million during the first quarter of 2012.

Besides announcing the additional authorization for share repurchases, Sallie Mae has declared a second quarter common stock dividend of 12.5 cents, payable on June 15, 2012, to shareholders of record as of the close of business on June 1, 2012. Notably, the company had hiked its dividend by 25% in January this year.

Furthermore, Sallie Mae declared a 2012 third-quarter dividend on its Preferred Stock Series A of $0.87125 per share, payable on July 30, 2012, to shareholders of record as of the close of business on July 20, 2012. The company also declared a 2012 second-quarter dividend on its Preferred Stock Series B of $0.5554883 per share, payable on June 15, 2012, to shareholders of record as of the close of business on June 5, 2012.

Our Take

We believe that such shareholder-friendly efforts by Sallie Mae would inspire investor confidence in the stock. In fact, it was during the first-quarter 2011 earnings release that Sallie Mae declared a quarterly dividend of 10 cents per share on its common stock for the first time since early 2007.

Moreover, the company also announced a share repurchase authorization of up to $300 million of outstanding common stock in open-market transactions at that time. In 2011, the company completed this share repurchase authorization by buying back 19.1 million common shares for $300 million.

Besides boosting investors’ wealth, Sallie Mae’s leading position in the student lending market and the federal student loan assets acquisition augur well. After the legislation stopped private student lenders from originating federal student loans, Sallie Mae is actively seeking to diversify its business and originate more private education loans.

Though the legislative actions challenged the company’s business model, we expect Sallie Mae to benefit from the Department of Education’s servicing contract, under which it services and collects government guaranteed loans. Given its low-cost business structure, we believe this new role will support Sallie Mae’s profitability and help produce an acceptable risk-adjusted return.

While such efforts are encouraging, we believe it would take some more time for the company to reap the benefits of transitioning to its business model. But despite challenges, we anticipate that the company’s cost containment efforts would help it navigate through the current cycle.

Notably, one of Sallie Mae’s peers, Nelnet Inc. (NNI) authorized a new share buyback program earlier in May, to repurchase up to a total of 5 million shares of its Class A common stock during the three-year period ending May 24, 2015.

Sallie Mae retains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering the fundamentals, we have a Neutral recommendation on the stock.