H&R Block also may pique the interest of dividend-focused investors. The current yield is a nice 3.6%, and the payout ratio is a very reasonable 40% of net income. With management re-focusing strictly on the tax prep business instead of ill-advised projects like subprime loans, there should be plenty of free cash available for the dividend to grow.
The final positive is momentum. 2010 was a poor year for the firm, with changes at CEO and CFO, the loss of refund anticipation loan (RAL) funding, and total returns falling 4%, with higher-priced retail branch filings down 6%.
So far in 2011, though, the metrics are improving. Through the first half of tax season, returns filed at branch offices were up 2.6%, and DIY filings up over 13%. This is especially impressive considering Block is unable to offer RALs anymore. The dramatic problems at Jackson-Hewitt, which could be nearing bankruptcy, have helped, as has new initiatives like filing 1040-EZ forms for free.
Despite these positives, there are still reasons to be wary of investment. Block's software offering growth has lagged badly against TurboTax in the past. Software is a much lower revenue contributor, bringing down revenue-per-filing rates.Further hurting these rates are increased office-based competition, both from small chains like Liberty Tax Service and from "pop-up" operators and accountants nationwide, which drastically undercut Block's fees. In the long run, this is a market share industry, with not much organic growth. Add to this the fact that the market size opportunity will decline for the foreseeable future and there is not too much to be excited about. 2011 and possibly 2012 look decent for this company, as market share stabilizes and the effects of cost cuts take hold. But given the poor long-term picture, I highly doubt that Wall Street gives back the 6% to 7% earnings yield the stock used to enjoy. My fair value for HRB is $19, which is only about 12% of upside given the stock's current run. That's not enough to recommend it. Most of the returns have already been filed on this stock. MagicDiligence is putting the "neutral" rating on it. You can do better elsewhere.