Profit When The Tax Man Cometh: H&R Block

In Uncategorized on December 16, 2010 at 8:48 pm

Tax season is a months away and most people would rather focus on Christmas right now. Retailers are the companies that everyone is talking about. How good will Q4 be for Nordstrom’s? How much will Amazon grow this quarter over last year? But you might be rewarded for taking a quick look at H&R Block.  Its stock has gotten pretty beat up this year and now sports a 4.6% dividend yield.

Taxes are a constant and unavoidable fact of life in developed nations. Income taxes even for fairly normal family situations have complications and wrinkles that require the expertise of a professional tax preparer. This is where H&R Block plays. The Company is the largest tax preparer in the United States – it prepares 15.6% of all U.S. personal tax returns.

It hires low paid seasonal staff (retired people, stay at home moms), trains them well and runs a tight, efficient operation. Some of the Company’s operations are franchised, offering solid cash flow with almost no capital investment. The Company has extended its brand into software and online services to compete in the digital do-it-yourself market (where it competes with Intuit).

The Company also operates a Business Services segment (22% of revenue) which includes accounting firms RSM and McGladrey and Pullen. These firms provide tax and consulting services, wealth management, and capital markets services to middle-market companies.

The Company generates strong “owner earnings” (cash flow from operations less capex/acquisitions) and returns on capital. It requires little in the way of capex and acquisitions leaving lots of money to return to shareholders through dividends and stock buybacks. Growth isn’t great but will keep pace with inflation. By my calculation, normalized owner earnings are around $425m. Based on this and the extra cash on the Company’s balance sheet, I believe the stock is a buy at or below $13.50 per share (market cap of $4165m) for a long term investor. At this price, returns should be superior to those offered by the general market.


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