H&R Block (HRB) is a global consumer tax services provider; the company offers comprehensive tax return preparation through its over 10,000 company owned and franchised locations around the world, notes Ben Reynolds, editor of Sure Retirement.
H&R Block also provides tax software. The $4.1 billion company prepares 21.6 million U.S. tax returns and generates revenue of $3.4 billion annually.
H&R Block reported results for the first quarter of fiscal 2022 on November 2nd, 2021. The company reported an adjusted earnings-per-share loss of $0.78 compared to loss $0.24 in the prior year. Revenue fell 54% to $193 million.
The decline in both earnings-per-share and revenue was due to an extended tax filling period in the prior year’s quarter. The company repurchased $166 million of shares, retiring close to 4% of the outstanding share count.
Competitive Advantage & Recession Performance
H&R Block benefits from durable competitive advantages. The company is the leading brand in the tax preparation industry and provides a necessary service to taxpayers. This provides the company a sizable potential customer base as nearly all taxpayers must file a tax return with the government.
While automation and do-it-yourself software is starting to encroach on traditional tax preparation, H&R Block has been quite successful at growing its business over the years. The complex U.S. tax code often requires the expert know-how that the company can provide.
H&R Block wasn’t as impacted by the last recession as most companies, and it remained profitable throughout the Great Recession. The company produced earnings-per-share of $1.39, $1.53, $1.46, $1.35, $1.25, and $1.69 for the 2007 to 2012 period of time. Tax filing still has to occur even in an economic downturn.
Growth Prospects, Valuation & Catalyst
H&R Block’s earnings-per-share growth has varied greatly in recent years. This was primarily due to an extension of the tax filing decade into the first quarter of fiscal 2021 as a result of the pandemic. Fiscal 2020 results were lower than usual and fiscal 2021 were considerably higher as a result. We expect that the company’s business will normalize, and that earnings-per-share will grow by 3.7% annually.
With shares trading at $24 and our expectation of $2.84 in earnings-per-share for the fiscal year, H&R Block is trading with a price-to-earnings ratio of 8.3. With a fair value target valuation of 9.4 times earnings, this implies a 2.4% contribution from multiple expansion over the next five years.
H&R Block has raised its dividend for six consecutive years and the stock yields 4.6% today. Combining our expected earnings growth rate, generous yield, and a small tailwind from multiple expansion, we expect that H&R Block will provide a total return of 10.1% annually over the next half-decade.