H & R Block Inc (NYSE:HRB) plunged in morning trading recently. The Kansas City-based tax preparation firm fell despite an earnings beat. Price cuts designed to “appeal to customers” did not likewise appeal to potential investors in HRB stock.
Now, the company, which competes with companies such as Intuit Inc. (NASDAQ:INTU) and privately-held Jackson Hewitt Tax Service, Inc., has left its investors wondering what will come next.
Given the stock’s history, growth investors will not likely want to invest. However, the plunge in the value of HRB stock combined with a dividend increase might create an opportunity for a specific class of investors.
HRB Beats Earnings and Revenue
At first glance, one might not understand the massive dive in HRB stock. After all, the company reported Q4 earnings per share (EPS) at $5.43. This beat estimates by 16 cents per share. In the same quarter one year ago, HRB reported an EPS of $3.76. Revenues also bested expectations.
The $2.39 billion in reported revenue came in $50 million ahead of expectations. It also beat the $2.33 billion reported one year ago.
For the fiscal year, the company also posted impressive numbers. EPS came in at $2.91, up from $1.91 in the prior fiscal year. Revenue also rose to about $3.16 billion, up from just under $3.04 billion in the prior year. The company also announced the quarterly dividend would rise to 25 cents per share, up from the previous 24 cents per share.
So Why the Drop?
So how does that justify a near 20% drop in the value of the stock? Well, 2019 guidance disappointed Wall Street. For fiscal 2019, HRB predicts revenues will come in somewhere between $3.05 billion and $3.1 billion. Analysts had previously expected $3.14 billion on a consensus basis. They also see margins dropping to a level between 24 and 26%.
To be sure, HRB has seen changes lately. The company brought in Jeff Jones, formerly of Target Corporation (NYSE:TGT) as its CEO in late 2017. Hence, that has changed the company’s direction at some levels.
Also, HRB has not attracted investors for its growth. Strangely, the stock hit its post-financial crisis low in late 2010, about 18 months after most other stocks achieved such a low. Moreover, that low came in at $10.13 per share in late 2010.
Now, nearly eight years later, the stock trades at just at around $24 per share following the post-earnings drop. Hence, HRB has dramatically lagged the performance of the S&P 500 on a long-term basis.
Growth predictions will also not help the stock in the near term. With revenues slightly down and earnings estimates for the next two years standing at $2.38 per share, the stock will likely see a lower level of growth.
HRB Still Can Perform
That said, I think investors need to look at where this stock is stuck. Consensus earnings place the forward price-to-earnings (PE) ratio at about 10.1. The average PE ratio in HRB over the last five years stands at about 18.25. Investors should also note that the PE has not fallen below ten since just after the financial crisis.
To be sure, I think investors looking for growth should still avoid this stock. However, one type of investor needs to look at buying—the income-oriented investor. The dividend increase to an annual $1 per share combined with the plunge in the stock’s value makes the yield quite attractive. Those who buy the stock today will enjoy a yield of over 4.15%.
HRB stock does not see a dividend increase every year. However, it has paid a dividend in every quarter since 1962. It has also not cut its dividend since 2005. Hence, income-oriented investors may have received a great opportunity from Wall Street’s extreme reaction to its earnings guidance.
The bottom line on HRB stock
Given the history and dividends of HRB, the post-earnings selloff in the stock might create an opportunity for income-oriented investors. With profits likely to stagnate and a tepid long-term growth history, growth-oriented investors have little reason to buy H&R Block.
However, for investors wanting income, the yield exceeding 4% and the historically low PE ratio creates opportunity. In addition to the yield, they will be paid well to wait while the PE of HRB stock returns to historical averages. With the opportunity to profit on both the dividend and the lower stock price, income-oriented investors should take an interest in HRB stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.