You know it’s tax season when H&R Block (NYSE:HRB) releases data about taxes: information like how much we’ve paid, and how big a refund we got. Tax season is H&R Block’s Super Bowl. The problem is that the company has a Super Bowl every year and yet it’s failed to do what’s necessary to move HRB stock higher.
Source: Mike Mozart via Flickr
Is this year different? Is there anything in the company’s playbook that is a catalyst for growth, something that investors can sink their teeth?
I highly doubt it.
Lousy HRB Stock Performance
If you invested $10,000 in HRB stock in April 2014, you would have a profit before tax of somewhere around $700. If you invested $10,000 in Intuit (NASDAQ:INTU) over the same period, your profit would be more than $26,000.
That’s a staggering comparison.
The last time I wrote about H&R Block stock was 2012. Back then, HRB was growing its digital business and threatening to put the fear of God in its online competitor. The company was in a transition. Its stock was trading, adjusted for dividends, around $11.83. Today, it’s over $25.
I suggested that the core business was stronger than most investors realized and were undervaluing its strong brand.
Let’s fast forward to the present and take a look at its current business.
One More Quarter to Go
H&R Block doesn’t report its fourth-quarter earnings until June 10. That includes February, March and April — the critical months leading up to the April 15 tax deadline.
So, I’ll make do with the Q3 2019 results.
The company’s biggest revenue generator is its U.S. assisted tax preparation. That brought in $329.6 million through the nine months of the fiscal year, 1.3% less than a year earlier. Overall, H&R Block’s revenue fell 0.6% through nine months, to $762.4 million.
It has ten revenue streams including the assisted tax preparation. One positive is the revenue growth from Tax Identity Shield, a service that protects you from tax-related identity fraud. It’s up 141% year-over-year. Unfortunately, it only accounts for 2.3% of the company’s overall revenue.
The company’s U.S. DIY tax preparation, which competes with Intuit, had $37.7 million in revenue through the third quarter. This was 3% lower than a year earlier. Representing less than 5% of H&R Block’s overall revenue, the DIY segment will take 100 years to make a meaningful contribution to the company’s top line.
However, it’s important to note that a majority of its revenue and profits comes in Q4. So how much progress has it made since 2012?
During that year, H&R Block prepared 7.4 million digital tax returns. In fiscal 2018, it prepared 7.5 million digital tax returns. This was slightly better than 2012’s tally, but 7.8% higher than 2017 results.
In other words, it’s holding its own, if not growing.
The Bottom Line on HRB Stock
The good news if you’re an HRB shareholder is that the company has paid quarterly dividends since the day it went public in 1962. Currently paying $1 in dividends on an annualized basis, it yields a robust 3.9%.
My InvestorPlace colleague Josh Enomoto likes this service stock because it’s something we all need to do once a year. Given a move toward more independent contractors, the demand for tax help is likely going to increase.
I don’t disagree with that.
However, the fintech movement continuously develops exciting apps that nibble away at the company’s once-dominant position in the tax industry.
HRB has done an excellent job pushing more to the bottom line. In FY 2018, the company generated $2.91 a share from $3.2 billion in revenue. That compares favorably from a decade ago, when H&R Block managed only $1.45 a share from $4.1 billion in sales. Still, it just doesn’t seem to have any catalysts to deliver consistent, double-digit sales growth.
And herein lies the problem.
Equity investing is not just about the dividend. You also need some capital appreciation to meet your total return target each year. On that front, HRB stock has been woefully inadequate.
If you’re an income investor and believe the security of the business and dividend is worth it, I don’t see a problem owning its stock.
Just don’t expect to get rich off it. That’s not happening until management finds a growth engine.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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