Berkshire Hathaway isn't the only conglomerate from Nebraska that's compounding shareholder money. Nelnet (NNI -0.15%), a diverse Lincoln, Nebraska financial company, has a federally guaranteed stream of money coming in that's getting put to work in other places. Between its steady stream of cash and its other businesses, Nelnet has promising upside for investors willing to explore off the beaten path.
Nelnet's big money maker
Nelnet used to originate student loans and earn money through interest payments from the borrowers. Since 1965, when the federal government announced that it would guarantee student loans, the underwriting business for student loans has been highly lucrative. However, in 2010 the Health Care and Education Reconciliation Act stopped commercial enterprises from writing these loans. Nelnet could no longer originate and loan money at its preferred interest rate. But just because Nelnet couldn't lend money doesn't mean it stopped making money.
Despite not writing any new student loans, Nelnet is generating consistent cash flow from the loans it's already written. Based on Nelnet's own estimates, it will generate roughly $1.5 billion in federally guaranteed cash flow over the next eight years. So Nelnet -- a $2.6 billion company -- is guaranteed to have 57% of its company's current value delivered in cash flow through 2028. And that's just one part of the business.
Nelnet has proven it's capable of reinvesting that cash flow at an impressive rate. Since 2004, Nelnet has compounded its book value plus its dividend at a rate of 17.4% per year!
Alongside Nelnet's remaining interest from student loans, it also offers loan servicing to other underwriters. Loan servicing is an element of the lending process that deals with the administrative side, and it often gets overlooked. Anyone who has paid a mortgage or took out a loan knows that the process can be much more extensive than just taking out money and paying it back over time. That's where Nelnet fits in.
Loan servicing includes anything from taxes and insurance, to collections, to even just simple communication with both parties. Lenders pay for this service, so Nelnet's customers here include the federal government, banks, fintech companies, or really anyone originating loans. These lenders are paying Nelnet on a per-borrower basis that varies depending on the loan size.
Nelnet categorizes this part of its business as Nelnet Diversified Services (NDS). Last year, NDS generated $455 million in revenue and $59 million in net income. While it's not growing much on its own, NDS provides a good source of cash flow that can be invested in Nelnet's other initiatives.
Outside of Nelnet's loan servicing and old origination businesses, Nelnet does a lot more.
Nelnet Business Services:
Nelnet Business Services (NBS) represents the company's largest division outside of loans. NBS is an education technology and payments processing entity that offers a software-as-a-service solution for K-12 administrators, as well as tuition processing for private schools and higher education institutions.
In 2019, NBS had a record year, recording $277 million in gross revenue, a 25% increase from the year prior. However, COVID has brought its own challenges to NBS. As most classes went remote and schools started tightening their budgets, revenue growth slowed. For the first nine months of 2020, NBS revenue has grown only 1.5% compared to the prior year.
ALLO Communications is Nelnet's fiber-optic TV and internet business, which as of June 30 provided cable to 53,000 residential subscribers and thousands of businesses across 12 different communities in Nebraska and Colorado.
Nelnet recently sold 48% of ALLO to SDC Capital Partners for $197 million. According to the president of ALLO Communications, Brad Moline, the goal of this sale is to finance ALLO's expansion of its fiber-optic-network into several communities across the midwest. While this deal does lower Nelnet's earnings payout of whatever ALLO makes, it should hopefully give Nelnet a smaller slice of a much bigger pie.
Nelnet has also invested $52 million in the video review and performance analysis tool Hudl. Hudl allows sports teams and athletes of all ages to review film and enhance performance. While Hudl was mostly known for its popularity in the high school football space, in 2019 it acquired Krossover and Wyscout to help garner market share in both high school basketball and professional soccer.
Hudl has undergone several other private investments from various venture capital firms and according to Pitchbook, its latest round of funding valued the business at $460 million. Although Hudl's valuation is essentially meaningless until it hits the public markets, Nelnet does have to adjust the estimated value of its investment based on new funding rounds. Despite any possibly inflated valuations from these new funding rounds, Nelnet has stated that it remains very optimistic about its investment in Hudl.
To accompany all these other businesses, Nelnet has deployed around $329 million in capital over the last seven years to what it classifies as "other investments." Since these investments aren't largely significant to the overall business, Nelnet does not disclose all of them in depth. From what Nelnet does mention, it has several real estate and venture capital investments, and has funded more than 76 solar project sites that generate enough solar power to deem Nelnet a net carbon negative business.
Nelnet has always shown a strong history of capital allocation and it doesn't look like it's stopping soon. Investors should keep a watchful eye on Nelnet's operating cash flow figure, as well as where management decides to reinvest that capital.