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Sallie Mae Upgraded to Outperform

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We are upgrading our recommendation on SLM Corp. (SLM - Free Report) , commonly known as Sallie Mae, to Outperform from Neutral based on its impressive capital deploying efforts. We also believe that the regulatory issues would be manageable on the company’s part.

In addition, its diversifying efforts, improving credit quality trends and increasing private student loan originations serve as catalysts.

Aided by a fall in loan loss provisions and decrease in expenses, Sallie Mae’s first-quarter 2012 core earnings came in at 55 cents per share, beating the Zacks Consensus Estimate of 52 cents. Private education loan origination advanced 23% year over year while loan charge-offs reached the lowest rate since the third quarter of 2008.

Sallie Mae has reiterated its guidance for 2012. For the full year, management expects to generate core earnings of $2.00 per share and anticipates private education loan originations of $3.2 billion.

Sallie Mae remains committed to boosting investors’ confidence through dividend increases and share buybacks. In January 2012, the company hiked its quarterly dividend by 25%. Alongside, the company declared a $500 million share buyback program.

In late May, the company authorized an additional $400 million to be utilized in the company’s ongoing share repurchase program previously announced in January, 2012. The program does not have an expiration date.

As a matter of fact, it was during the first quarter 2011 earnings release that the company declared a quarterly dividend of $0.10 per share on its common stock for the first time since early 2007. Moreover, the company had then announced a share repurchase authorization of up to $300 million of outstanding common stock which it completed in 2011 by buying back 19.1 million common shares. Such shareholder-friendly efforts on the company’s part tend to inspire investors.

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 such as Sallie Mae and Nelnet Inc. from originating federal student loans, Sallie Mae started to actively diversify its business and originate more private education loans.

The company is also focused on controlling its expenses. We expect such factors to help the company navigate through the current cycle.

Sallie Mae is scheduled to report its second quarter financial results after market closes on July 18, 2012. According to the Zacks Consensus Estimate, the company is expected to report earnings of 54 cents for share for the quarter.

Additionally, Sallie Mae retains a Zacks #1 Rank, which translates into a short-term Strong Buy recommendation.

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