Friday, December 07, 2007

First Marblehead cuts its dividend

Finally some bad news from First Marblehead to justify its massive price drop. Here is the key paragraph from the press release:

"Due to uneconomic terms in the current capital markets, we have elected not to securitize private student loans this quarter. We are exploring non-securitization and securitization alternatives for future quarters to enhance our business model and provide long-term capacity to the private student loan market in a manner that benefits our shareholders. Our business volumes remain strong and we see many opportunities to facilitate and process private student loans," said Jack Kopnisky, Chief Executive Officer and President of The First Marblehead Corporation. "Our Board of Directors determined it was prudent to continue to return capital to our shareholders this quarter even during these challenging times."

Cutting the dividend is pretty close to a cardinal sin in my book, but I'm not ready to dump my shares yet. For one thing, the stock has dropped faster than the dividend, so the shares are still undervalued. For another, it isn't clear to me that this is a real cut. A year ago the dividend was 12¢ a share, which is what it will be this quarter too. Further, the press release makes the cut sound temporary and tied to the failure to securitize loans this quarter. If so, First Marblehead's earnings might be pushed into next year rather than cut off.

I don't think I've made a mistake here since I don't try to pretend to predict the market for privately placed bonds that Marblehead operates in. Clearly their raw material (student loans) are available in abundance, but customers (investors) are reluctant to buy. The good news is that these loans are probably higher quality than most others on the market so when buyers return, they will look at FMD bonds first.

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