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Navient Corporation NAVI shares touched a 52-week low of $12.96 on Friday. The stock closed the session a little higher at $13.05, declining 14.3% in the past three months.
The stock has underperformed the industry and its peers like Capital One Financial Corporation COF and Discover Financial Services DFS in the past six months.
Three-Month Price Performance
Image Source: Zacks Investment Research
Here’s What Leads to NAVI’s Drop to 52-Week Low
Limited Organic Growth: Organic growth has become challenging for Navient as servicing revenues witnessed a negative compound annual growth rate (CAGR) of 33.1% over the past three years (2020-2023). The metric remained flat year over year in the first nine months of 2024.
Going forward, regulatory changes may result in higher-than-anticipated prepayment rates on the company's portfolio of loans. Also, if Navient fails to acquire loans or expand or develop alternative revenue sources, its top line is likely to be under intense pressure.
Higher Debt Level: Navient’s balance sheet position raises concerns about its ability to manage debt obligations. As of Sept. 30, 2024, the company held total debt (comprising long-term and short-term borrowings) worth $50 billion, while cash and cash equivalents were $1.14 billion. Given such a high debt burden compared with the available cash levels, NAVI might be unable to continue meeting debt obligations in the long term.
Unsustainable Capital Distribution: Navient’s capital distribution activities keep us apprehensive. The company currently pays a common stock dividend of 16 cents per share. At present, NAVI's dividend payout ratio is 31%. Furthermore, its debt-to-equity ratio of 16.59% is significantly higher than the industry average of 1.21%.
Hence, given these unfavorable factors, we believe that the capital distribution activities might not be sustainable.
On the flip side, its competitors like COF and DFS seem to have sustainable capital distribution plans. Currently, COF pays out a quarterly dividend of 60 cents per share, whereas DFS pays 70 cents per share. At present, COF and ALLY have payout ratios of 18% and 23%, respectively. Both companies’ debt-to-equity ratios are below the industry’s average.
Navient’s Long-Term Prospects Look Bright
Fed’s Interest Rate Cuts: NAVI is poised to benefit from improving financial conditions as the Federal Reserve started to lower interest rates in September 2024, with the most recent reduction occurring on Dec.18.
The company’s net interest income (NII) witnessed a negative CAGR of 11.7% over the past three years (2020-2023) due to high interest rates. In the first nine months of 2024, the downward trend for NII continued. However, as the Fed lowers interest rates, demand for consumer loans is expected to pick up, strengthening origination volumes and retail loan growth. As a result, Navient will likely see a rebound in net financing revenues in the upcoming quarters.
Cost-Control Initiatives: NAVI aims to improve operating efficiency by undertaking various cost-control initiatives. Navient’s expenses declined, seeing a compound annual growth rate of 4.9% over the last four years (ended 2023). Though the trend reversed in the first nine months of 2024, the ongoing efforts by the company for expense reduction remain encouraging.
In January 2024, Navient announced initiatives to reduce costs, including outsourcing servicing to MOHELA in April 2024. Nearly 900 employees were transferred, and a variable cost servicing model was implemented. Additionally, NAVI streamlined its organizational structure in the second quarter of 2024 to focus on servicing and BPS transitions, aiming for an 80-90% reduction in its workforce. These moves are expected to lower expenses and drive bottom-line growth.
Earlier this month, NAVI entered an agreement to sell its Government Services business to an affiliate of Gallant Capital Partners, LLC, a Los Angeles-based investment firm. Navient’s Government Services business includes Navient Business Processing Group, Duncan Solutions, Gila, Pioneer Credit Recovery and Navient BPO. About 1,200 employees will be included in the transaction, which is expected to close in the first quarter of 2025. NAVI’s agreement to divest its Government Services business enables it to focus on core operations in education finance and business processing solutions.
The company’s move to divest Government Services business comes when companies increasingly seek to optimize their business models and concentrate on their primary areas of expertise. By offloading this segment, Navient is expected to enhance its operational efficiency and financial performance.