What if you could go back in time and be an early investor in Warren Buffett's Berkshire Hathaway? Obviously, this is wishful thinking and you can only think about what you could have done with the phenomenal returns that have been generated over the decades. Berkshire's average 20% compounded returns since 1965 would have easily turned $1,000 into well over $1 million for many investors.
You have have missed out of Berkshire's great run, but what if you could invest in the next Berkshire Hathaway? What if I told you there was a company out there putting up similar levels of compounded growth and it's getting little coverage from Wall Street at the moment?
The company does exist, and its name is Nelnet (NNI -0.39%). Here's why this dividend grower has what it takes to provide consistent monster returns for your portfolio over the next few decades.
What is Nelnet?
A few decades ago, Michael Dunlap formed Nelnet as a college student loan originator in the United States. For years, the company stuck within this student loan niche, putting up great returns through these highly reliable, government-backed credit instruments. The company went public through an initial public offering (IPO) in 2004 after years of steadily growing its student loan book.
But then, the Obama administration decided to ban private companies from originating student loans, taking the process in-house for the federal government. This put Nelnet in a pickle as the government basically said they had to stop their entire business.
Luckily, the change in government policy didn't mean its business went away overnight. Since student loans sometimes take multiple decades to pay off, the loans it originated in the years prior would still be on its balance sheet earning interest income. Today, Nelnet still has billions of dollars' worth of loans from these old originations.
Eventually, management realized it needed to diversify away from student loan originations as the loan book would eventually run dry. Over the last decade-plus, Nelnet has taken that student loan cash flow and focused it on a few segments that now make up a larger portion of this business, including solar energy investments, education software/payments products, and a venture capital portfolio. The hidden value they create for investors makes the stock incredibly cheap today.
Resuming student loan payments
First, we need to discuss the state of its student loan business. The government put a moratorium on loan repayments during the pandemic, and the Biden administration has made multiple efforts to institute student loan forgiveness for some segments of the populace. Some of these efforts were rejected by the courts. The industry has become a bit of a political football.
On Sept. 1, the government is expected to lift the payment moratorium and require borrowers to start paying back their loans again. This is good news for Nelnet as it will receive repayments once again on many of the loans sitting on its balance sheet. Over the next three years, management projects Nelnet will see over $200 million in cash flow annually from these loans.
More importantly, with this moratorium finally ending, Nelnet's student loan servicing business can get back up to speed. The company started this segment years ago as originations dried up and now manages hundreds of billions of dollars in loans for borrowers. This segment has been depressed financially due to the moratorium but still generated $65 million in operating income in 2022. Over the next few years, investors should expect profitability for this segment to grow significantly, likely to over $100 million in annual earnings.
Hidden assets will provide value
Back to the Berkshire Hathaway comparison, there is more to Nelnet than just student loans. The company is using its cash flow to build up an array of subsidiaries and investments. The two most important at the moment are its education software/payments segment and its investment in Hudl.
Nelnet sells software to school administration offices around the country to help schools that charge tuition manage payment processing. This business segment focuses on the K-12 market and managed to gain control of this niche industry over the last decade or so. It is now a sizable business generating $409 million in revenue in 2022 and $74 million in operating income. Earnings grew steadily, making it a new cash cow for Nelnet and affirming the company's success at diversifying away from student loans.
Nelnet's investment in Hudl is much different but could prove just as valuable. Hudl is the dominant software product globally for sports teams needing to process, store and analyze video footage of games, practices, etc. This software likely generates hundreds of millions in revenue through all its sports segments. Nelnet owns an estimated 20% of this private business and has been its lead investor for many years. The company not only holds Hudl at a small cost basis on its balance sheet, but the investment could also be worth $500 million to $1 billion if Hudl goes public, which could happen within the next few years.
Oustanding historical performance
As a conglomerate, the Nelnet story can get complicated. Along with the business segments and subsidiaries already mentioned, Nelnet also has a fiber communications investment and solar energy subsidiary. Both could provide a lot of upside in the years to come.
Ultimately, the value of a lending/investment holding company will be determined by growth in book value per share and the cash it returns to shareholders. Nelnet has a fantastic track record of growing its dividend payouts and book value. Since it started paying a dividend in 2009, Nelnet's dividend per share has grown by 264%. It is currently yielding just 1.1%, but it should be a fantastic dividend growth stock for the next decade and beyond.
NNI Dividend Per Share (TTM) data by YCharts. TTM = trailing 12 months.
And what is fueling these growing dividend payouts? Growth in book value per share. Including dividend payouts, Nelnet has grown its book value per share at a 16.6% rate since 2004, which is not far from Berkshire's 20% compounding at Berkshire Hathaway. At a dirt-cheap market cap of just $3.46 billion, Nelnet is set to crush the market if it can continue growing book value at its historical average.
As long as the current management team sticks around, you can rest easy holding shares of Nelnet in your portfolio for many, many years.
