A 4.2% dividend and it’s still cheap

Finding value in this market is near impossible.

That is unless you have access to our proprietary data.

Because when we looked at the top financial pro searches for personal services, one stock stood out.

H&R Block (HRB) isn’t a sexy company.

But you know what is attractive?

Its ridiculously cheap valuation and +4% dividend yield.

Every year the company generates more than $3 per share.

With the stock trading at $25 per share, that means the company could buy all its outstanding shares in 8 years!

No, the company has practically no growth to speak of.

Heck, in the last decade they average -0.64% revenue growth.

But that’s about to change.

And here’s why.

H&R Block’s Business Transformation

Most of us know H&R Block as the tax people.

The company provides assisted income tax return preparation, DIY tax solutions, and other products and services related to tax preparation in the US and Canada.

Traditionally, the assisted income tax prep services are done through retail offices operated by the company or franchisees. 

H&R Block also offers ancillary services including Refund Transfers, Advance Lines of Credit, Extended Service Plans, Tax Identity Shield, Prepaid MasterCards, and refund advance loans.

Headquartered out of Kansas City, MO, the company has around 11,600 locations.

Management has been aggressive at returning cash to shareholders with a repurchase program of nearly 25% of the total shares outstanding in the last six years.

That’s on top of the hefty dividend the company pays out each and every year.

Management has set out long-term growth of 3-6%. However, their ‘upside’ potential rests in their Block Horizons program.

Block Horizons aims to expand the company’s business into three key areas: digital experience, small business, and financial products.

In a nutshell, the program aims to build stronger relationships with small businesses through Wave and Block Advisors, develop their Emerald Card as a consumer-centric, mobile-first solution for the under-banked, and make taxation faster and more personalized through integrating human expertise with digital tools.

This massive transformation comes with a hefty price tag as well leading operating expenses of $2.6 Billion to increase 3.2% in FY ‘21.

Financials

We won’t spend too much time with the financials other than to point out a few key items.

First, as we noted earlier, H&R Block has seen practically no growth over the last decade.

Covid hurt them as tax filings were deferred and customers filed online by themselves in many cases.

Second, earnings per share grew at 15.63% over the last five years and 8.93% over the last decade.

Lastly, a few analysts pointed out the current debt load stands at nearly $2 Billion while cash onhand dropped to $892 million.

We don’t see this as much of an issue considering operating cash flow pushes out more than $600 Million per year.

Valuation

Combined with the Block Horizons program, this is where we find the most compelling reasons to own the stock.

We want to first start with cash flow.

As we noted earlier, with ~$626 Million in operating cash flow annually, it would take the company eight years to buy back all its outstanding shares.

What we find equally important are the constraints to maintain a healthy balance of dividend payouts, repurchases, and growth investments.

For FY’22, management provided the following outlook:

Using these numbers, we estimate operating cash flow of between $552.6 – $568.3 Million, down ~$75 million from this year.

Now, let’s turn to the rest of the valuation metrics to finish up our discussion.

Obviously, the price-to-earnings ratios trailing and forward stomp the rest of the consumer discretionary sector.

H&R Block gets dinged on ratios that include sales.

Why?

Because revenue growth was non-existent.

That’s why the current transformation plan is so important to the company’s future.

Our Opinion 10/10

We love the risk/reward relationship here.

With a stable cash flow base, we don’t expect shares to tumble far even if the overall market does.

The way we see it, valuations more than justify the current share price. This gives us the upside growth for free, or at least as close to it as you can find.

Given this and the historically cheap valuation, we could see shares doubling over the next 4 years.