(SLM) Sallie Mae Stays Outperform

We have reiterated our Outperform recommendation on SLM Corp. (SLM), better known as Sallie Mae, following its fourth quarter and full year 2011 earnings release and the recent announcement of dividend increase and share buyback authorization.

Sallie Mae reported fourth-quarter 2011 core earnings of $268 million or 51 cents per share, a penny above the Zacks Consensus Estimate. However, the results compare unfavorably with the prior-year quarter’s core earnings of $401 million or 75 cents per share. For full year 2011, Sallie Mae reported core earnings of $977 million or $1.83 per share, in line with the Zacks Consensus Estimate.

Improvements in net interest income, loan loss provision, expenses and discontinued operations supported the core earnings figure. Yet, a decrease in gains on loan sales and debt repurchases from the prior-year period led to the drop in core earnings of Sallie Mae.

Sallie Mae remains committed to boosting investors’ confidence through dividend increases and share buybacks. Recently, the company announced a 25% hike in its quarterly dividend to 12.5 cents per share from 10 cents.

The company declared a $500 million share buyback program. The increased dividend will be paid on March 16, to shareholders of record as of the close of business on March 2. The share buyback program has no expiration date.

During the first-quarter 2011 earnings release, SLM 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. In 2011, the company completed this share repurchase authorization by buying back 19.1 million common shares for $300 million.

We believe that such shareholder-friendly efforts will give a boost to investors’ confidence in the stock. Moreover, its leading position in the student lending market, cost curtailment initiatives and the federal student loan assets acquisition augur well.

Though pausing new federal student loan origination, to comply with the legislation, would affect revenue generation at student lenders such as Sallie Mae and Nelnet Inc. (NNI), we believe that its diversifying efforts coupled with an economic recovery, though at a sluggish pace, will bolster its earnings.

Sallie Mae shares also retain a Zacks #1 Rank, which translates into a short-term Strong Buy recommendation.

NELNET INC CL-A (NNI): Free Stock Analysis Report

SLM CORP (SLM): Free Stock Analysis Report

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