The Tax Company Cometh on Strong

by Jonathan Yates | January 24, 2012 5:30 am

Not many people are happy about taxes, but shareholders of H&R Block (NYSE:HRB[1]) have plenty of reason to love the tax season. H&R Block already has gained more than 17% for the past quarter and almost 23% for the past 52 weeks, and the busy season is ramping up once more.

In addition to its return significantly beating the S&P 500, the income element of H&R Block is superior, too. The average dividend yield for a stock on the Standard & Poor’s 500 Index is around 2%, while H&R Block pays out 4.7%.

Importantly, this dividend income stream is supported by a modest payout ratio of under 45%. This is significant for a variety of factors. For one, it reflects the sound financial management of H&R Block, which isn’t sacrificing cash flow to pay a dividend. Some companies, such as Merck & Co. (NYSE:MRK[2]), have payout ratios of over 100%. It also demonstrates the respect that the board of directors has for the rights of shareholders.

And the current payout ratio means H&R Block has latitude to raise the dividend and/or initiate share buyback programs without hindering operations in the future.

H&R Block’s valuation is decent, with a price-to-earnings ratio of 12.94, and it’s projected to fall to just 9.54 during the next year — much lower than the S&P mean. Earnings-per-share growth is expected to be 10% for the next five years, and supporting this earnings growth are rising sales. HRB’s returns and margins are all positive, too — return on equity is more than 47%, gross margin tops 36% and the profit margin is more than 12%

Financials this strong naturally have attracted the support of institutional investors and insiders. Institutional investors, such as mutual funds and pension groups, own more than 90% of the stock’s outstanding shares — a very bullish indicator. Another positive sign for H&R Block is the increasing amount of insider buying. Mutual fund legend Peter Lynch said there are many reasons for insiders to sell a stock, but only one reason to buy: the expectation that the share price will rise. During the past six months, insider ownership for H&R Block has climbed more than 31%.

Now trading around $16.20, the mean analyst target price for H&R Block over the next year is $19.43. With its high dividend, low beta and strong volume, H&R Block is an ideal stock for capture-the-dividend trading[3]. And for the buy-and-hold investor, the high dividend yield of H&R Block rewards the patience and loyalty of shareholders.

As of this writing, Jonathan Yates did not hold a position in any of the aforementioned securities.

  1. HRB:
  2. MRK:
  3. capture-the-dividend trading: http://http/

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