H&R Block, Inc. (NYSE:HRB) stock is about to trade ex-dividend in three days. If you purchase the stock on or after the 4th of December, you won't be eligible to receive this dividend, when it is paid on the 4th of January.
H&R Block's next dividend payment will be US$0.26 per share, on the back of last year when the company paid a total of US$1.04 to shareholders. Last year's total dividend payments show that H&R Block has a trailing yield of 5.5% on the current share price of $19. If you buy this business for its dividend, you should have an idea of whether H&R Block's dividend is reliable and sustainable. So we need to investigate whether H&R Block can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 83% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 41% of its free cash flow in the past year.
It's positive to see that H&R Block's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by H&R Block's 6.6% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. H&R Block has delivered 5.7% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. H&R Block is already paying out 83% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
From a dividend perspective, should investors buy or avoid H&R Block? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. To summarise, H&R Block looks okay on this analysis, although it doesn't appear a stand-out opportunity.
So if you want to do more digging on H&R Block, you'll find it worthwhile knowing the risks that this stock faces. Be aware that H&R Block is showing 5 warning signs in our investment analysis, and 2 of those are significant...
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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