If there’s one company that loves a tax-cut bill, it’s tax-preparer H & R Block Inc (NYSE:HRB). For most people, taxes are a nightmare. Even the simple tax forms, like IRS Form 1040-EZ, can gives people fits. So they run off to their local HRB or competitor to have it done for them. And suddenly, a business is born.
HRB has been around since 1946, and HRB stock went public around 1980. Today, HRB stock generates about $3 billion in revenue annually and about $400 million in net income.
HRB Stock Driven by Millions of Returns
The beauty of a business like HRB is that it is standardized. As complicated as taxes can be, most tax preparation is actually not that complicated. Even when it is, HRB has software it uses that just lets its employees punch in the numbers, and the answer is spit out.
That’s why I’ve always done my own taxes, often with the help of software — sometimes HRB software. People have to bring in receipts and enter the same set of numbers onto a form that most accountants and tax-preparers do anyway. But I like doing my taxes because I like money and numbers, so that makes me weird.
HRB stock has been driven by tens of millions of taxpayers each year running to its offices. In fiscal year 2017, HRB reported it prepared about 23 million returns or about 14% of all IRS filings. HRB has more than 10,000 offices around the world.
HRB stock is not in organic growth mode any longer. That has pros and cons. The cons, of course, mean that its business has matured. It isn’t stealing market share. That means that it isn’t deserving of a terribly high multiple.
Normally, this may disqualify a stock from consideration for me. However, I see possible benefits going forward for a number of reasons.
HRB Stock Dividend Has Room To Grow
First HRB may not be growing terribly much. But it is relatively stable and consistent. The total number of returns prepared has declined about 5% since FY15. But that’s not terribly large and it doesn’t appear to be accelerating. I suspect this is likely due to consumers shifting among preparers.
The company’s net income bounces all over the place, despite revenue being incredibly stable. It ranges from $2.9 billion in FY14 to $3.08 billion in FY15, with other years within that range.
The other advantage HRB stock has is that, because it is standardized, there is very little overhead. Thus, free-cash flow is also consistent, and also quite impressive, at $400-$500 million.
And that is where the critical piece of HRB stock lies. With capital expenditures being only about 20% of operational cash flow, the HRB dividend is 3.71%, and the HRB dividend has a payout ratio that is about 40% of free-cash flow. HRB stock paid out $187 million in FY17, leaving $273 million available.
That leaves it plenty of room to grow that dividend even more.
Good Future Ahead for HRB Stock
Even better, HRB has been doing what most mature companies do — it is repurchasing stock. I normally hate buybacks as a bad use of capital, but in this case, HRB has drawn down about a billion dollars in debt at about 4%, and repurchased about 25% of its flow in the past two years alone, reducing dividend payments by almost $30 million.
That’s why I see HRB continuing this trend. Buy back stock to reduce the total amount of dividends paid, but then raise the dividend per share. If HRB can hit 5% in the next couple of years, that would be terrific. I also think it is very possible.
HRB trades at 13x, but it is pursuing other financial products which I also believe will grow revenues over time. With the Obama administration out of the way and the Consumer Financial Protection Bureau about to be neutralized, I think HRB stock has good times ahead. HRB earning come out on Wednesday. Let’s see how they look.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].