This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About SLM Corporation
Alright, so we sort of have a gauge regarding how famed music artist Jermaine Cole, better known as J. Cole feels about formally government-sponsored student loan enterprise turned private-sector, publicly traded company, SLM Corporation, better known as J. Cole’s favorite company, Sallie Mae.
So how do we feel about it?
And perhaps more importantly, you should consider how you feel about it.
Well, first and foremost, we see what you’re saying, Jermaine.
Student loans are quite a complex topic of discussion, but it can be surely admitted that with the rise of more and more students applying to and attending college and/or post-graduate programs, there has also been a rather frightening exponential rise in loans taken out by said students and their families in order to achieve their educational hopes and dreams.
I guess it’s hardly a secret anymore that Sallie Mae is one of the largest, most prominent student loan lenders in the United States, offering college hopefuls and current students along with their families (most of the time, anyway) a host of financial products in order to finance their education and the company sure does make it easy to borrow.
Therefore, it can be seen that one of the primary ways in which SLM Corporation generates its revenue is through periodic payments received on the loans it issues, however, that most certainly doesn’t mean that the loans have a 100% guarantee of being paid back in full by the entity that took the loan out in the first place (cough, cough, 2008).
Of course, if one doesn’t pay their loan payments on time they are more than likely subject to weighty penalties and other fees that they may or may not be prepared to incur or pay.
Incidentally, many of these folks and/or their families might’ve not been financially equipped to take out these student loans at all.
Nevertheless, Sallie Mae, at the end of the day, is a legitimate business in the sense that it offers financial products and services (similar to that of a regular bank) and they’ve drummed up quite the customer base.
Being a college student, I find myself frequently surrounded by peers that are most infatuated and intent on gaining the college experience, typically throwing student loan caution and financial prudency to the wind.
As long as they get the real college experience (whatever that even is, as this is incredibly subjective) and can live it up for four years, student loans must be a great solution to solving my financial headaches so I can spend more of my money on going out or on other activities ingrained in my experience as a college student.
More often than not, it isn’t the best solution.
In fact, many students and other parties might be setting themselves up for complete and utter crippling failure through these loans, especially if they don’t read the fine print.
For instance, some report that Sallie Mae doesn’t allow any type of refinancing options, which, for those hit with unexpected tough times could really, really dig themselves in a deeper financial hole.
Also, easy money isn’t really ever easy, especially for recent college graduates that before even starting their careers are tasked with slowly and painfully paying down their student loans, which, of course, have accumulated interest over time.
To add to this misery, consumer and individual loans of all types are largely (so they say, at least) based on one’s credit history and in that, their historic and estimated future availability to fully pay back the loans they opt to take out.
This seems fair, as it is the general basis of the credit system, however, the problem is many of the students taking out loans hardly have any sort of credit history to show given their age, which “justifies” companies such as SLM Corporation offering and charging higher interest rates on the fixed and variable loans it offers.
It doesn’t really seem as though students who take out loans are set up for success, at least from what we have experienced thus far and heard directly from others.
At any rate, that is some of the basic information regarding Sallie Mae, its line of business, its operations, our general opinions and viewpoints on the student loan industry as a whole (the bubble will burst at some point, by the way) and here are some more concrete information related to the company’s finances.
SLM’s stock financials
In getting more in depth with Sallie Mae and its core financials, it can be seen that the company has a market capitalization of $4 billion, a prevailing price-to-earnings (P/E) ratio of 9.57, a current share price of $16.50 and also supplies its shareholders with an annual dividend of $0.44.
Putting all of this preliminary information together, Sallie Mae’s stock (NASDAQ: SLM) appears to be a little more than modestly undervalued given that its P/E ratio is well below that of the standard fair value benchmark of 20, which is a good start.
It’s also nice that the company dishes out a dividend to its shareholder base (even if it isn’t all that exciting) and as for the rest of the given information, from our perspective it isn’t all that pressing as it really just speaks to the company’s relative size, which we already knew was fairly large.
Digging deeper into SLM Corporation, its executive team is at the helm of approximately $28.8 billion in terms of total assets along with just about $27 billion in terms of total liabilities, which doesn’t intimidate us or make us quiver all that much given the overall nature of the lending business, however, we do hope that the company upholds its lending standards so as to collect as many payments and have the least amount of defaults as possible both now and later for the sake of preserving the overall quality and integrity of its balance sheet.
Onto the company’s income statement, Sallie Mae’s total annual revenues since 2018 are, on TD Ameritrade’s platform, specifically quantified and categorized as “Interest Income, Bank,” which is essentially just the interest payments it receives from the loans it issues, which have amounted to nearly $2 billion each year between 2018 and 2022, which is a good thing from a strict financial, investor’s perspective.
Namely, even amidst the ups and downs of the recent economic cycles SLM Corporation has been able to keep its total annual revenues coming in at a consistent rate on a year-over-year (YOY) basis, which is good to see for a company as large and established in the student loan industry as Sallie Mae.
For better or for worse from a general societal point of view (obviously, there is a lot of room for debate and discussion on the matter), collecting interest on student loans doesn’t seem to be a bad business, again, from a strict financial standpoint.
With that, Sallie Mae’s net income (according to the cash flow statement) isn’t in the worst of shape, as its net income since 2018 has remained positive each year, however, its total cash from operations have been negative between 2018 and 2021, eeking out a small gain of $5 million, as reported in 2022, while in other years the company’s total cash from operations was anywhere between -$16 million (2019) and -$183 million (2020).
This could be due to a few different things, perhaps one of them being that the company’s profit margins aren’t as impressive as we had initially anticipated or maybe it needs to cut out some of the fat within its operations so as to optimize and become more efficient and turn its total cash from operations positive.
It could also be caused by a company’s customers delaying their payments or not paying on time, which we worry is most likely the case with Sallie Mae and those it finances.
SLM’s stock fundamentals
While we are still on the general topic of the company’s profit margin, according to TD Ameritrade’s platform Sallie Mae’s trailing twelve month (TTM) net profit margin doesn’t seem to be the issue as it is listed at 24.75% to the industry’s listed average of 14.21%.
This is frankly a perk that comes with being an absolute staple in the student lending arena, as that is exactly what Sallie Mae is.
Am I right, J. Cole?
At any rate, this is a great sign that the company has been and still is able to generate a more than competitive TTM net profit margin, however, we do hope that the company finds ways in which it can maybe adjust the loans it originates and issues so as to better ensure that it can receive timely payments from its borrowers and through that, tighten up its total cash from operations figures moving forward.
Nevertheless, Sallie Mae does quite well on the TTM net profit margin side of things.
With respect to the company’s TTM return on assets, it is slightly lower than but overall still on track with the average of its respective industry, as also displayed on TD Ameritrade’s platform, SLM’s TTM return on assets sits at 1.57% to the industry’s relative average of 2.57%, which isn’t really by any means a considerable discrepancy but still one we would like to be narrowed over the next handful of years.
Should you buy Sallie Mae stock?
We will be among the first to admit that this is one of our more unique stock analysis articles.
It is fairly rare that we perform due diligence on a company that used to be a de facto entity of the United States government.
It is also unique in the sense that Sallie Mae is largely in the business of selling dreams and charging interest.
Honestly, we get it.
Business is business and in order to continue basically being a specialized banking facility for millions upon millions of students, some spread (i.e., profit) has to be attained.
At the same token, however, one can certainly question the lending practices and procedures employed by companies such as Sallie Mae and determine whether or not they deem them as fair or if one views them as being a bit too loan shark-esque.
Nevertheless, many students are quick to take on student loans or at times need them and Sallie Mae is providing a service.
Regarding the overall state of the company’s core financials, it runs a historically (recent history, at least) stable business that is likely to continue growing, objectively speaking.
While its share price does appear to be undervalued (at the time of this writing) and its balance sheet is in alright condition, we worry about student’s being able to or even having to pay back their student loans, as this is obviously a very legislation-heavy issue, with policies surrounding the sector seemingly changing every other day, for better or worse.
We don’t like this element, especially since a company such as Sallie Mae generates the vast majority of its revenues through interest payments that students and graduates must repay and if they don’t, sure, the company has some revenue protection through the penalties it enforces, but lack of timely payment will result in, as we have seen in this article already, pressure on the company’s cash flows, namely, its total cash from operations.
Combining all of these factors and pieces of information together, we would feel best in giving the company’s stock (NASDAQ: SLM) a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.