Student loan forgiveness has been a hotly debated topic in the early days of Joe Biden's presidency. Among the many potential beneficiaries is one small Lincoln, Nebraska, company that could rake in more than $1 billion in cash flow if the loans are forgiven. Here's how.
Background
Nelnet (NNI 0.38%), a mini Nebraska-based conglomerate, owns a $19 billion student loan portfolio. Thanks to the 1965 Federal Family Education Loan (FFEL) program, Nelnet's student loan portfolio has very little credit risk. The program established that if a borrower defaults on his or her student loans, the federal government is responsible for paying at least 97% of the principal and interest back to the lender.
Currently, Nelnet's loan payback period extends out past 2030 and should result in more than $2 billion in cash flow based on Nelnet's projections. Almost two-thirds of that cash flow is expected to come in the next five years if all goes according to plan. However, in the event that all or even a portion of outstanding student loan debt is forgiven, the federal government would assume the responsibility of paying back lenders. This likely means Nelnet would recognize some, if not most, of its cash flow much earlier than expected.
Image source: Getty Images.
What would Nelnet do with the cash?
Before I dive into the ways Nelnet could allocate some of that potential cash, it's worth noting that if an event like this were to occur and Nelnet did receive cash flow earlier than expected, it would be a one-time benefit. While it's unlikely to have any real impact on the amount that Nelnet rakes in, it certainly could affect the timing. But that's OK. If the revenue from interest on Nelnet's loans is pulled forward, the company could use that cash to create value elsewhere.
The most obvious way to do that is to issue dividends or repurchase shares, and Nelnet already does both. Over the first nine months of 2020, Nelnet repurchased 1.6 million shares for roughly $73 million and raised its quarterly dividend by 10%.
Nelnet has been known to put cash to work in other ways, as well. On Jan. 26 Nelnet entered an agreement to acquire Catholic Faith Technologies (CFT) -- a software-as-a-service provider of training platforms to churches and other non-profit institutions. Just three months prior to that acquisition, Nelnet also introduced Nelnet Bank in Salt Lake City, Utah. Kickstarted by $100 million of initial capital from Nelnet, Nelnet Bank should have no shortage of lending power as it enters this new market.
Operating businesses
On top of its loan portfolio, Nelnet owns and operates several other subsidiaries that could undoubtedly benefit from extra invested capital. Nelnet reports two different types of income on its income statement -- "loans" and "other." Other income encompasses all revenue outside of Nelnet's lending operations, and is a great number for investors to track. Over the first nine months of this year, revenue from Nelnet's other businesses continued to demonstrate strong growth, rising 10% compared to the same period in 2019.
One of Nelnet's many subsidiaries is a fiber-optic cable business called Allo Communications, serving markets in Nebraska and Colorado. Running any fiber-optic cable business requires significant upfront investments, so with extra cash from Nelnet, Allo could accelerate its expansion and steal market share from competitors.
In addition to Allo, Nelnet runs an education software business called Nelnet Business Services (NBS). NBS provides a suite of services for schools and institutions including payment processing, billing, administrative software, and more. In 2019, NBS generated $277 million in revenue and $47.3 million in net income from servicing more than 11,000 schools across the U.S.
While it might feel like there are plenty of places to throw new money, management always seems to know what to do with it. Since 2004, Nelnet has compounded book value per share at 17.4% annually. With this track record of capital allocation in mind, a big payday for Nelnet would be great for shareholders.
Perhaps the most exciting part about Nelnet is just how cheaply it's valued. Despite an impressive rise in net earnings over the last year, Nelnet's market cap, including cash and investments, is still only about 13 times its trailing-12-month net income. (But be warned, if you're interested in exploring further -- Nelnet's stock is thinly traded, so use a limit order.)
