H&R Block: Solid 3.7% Dividend Yield, But Growth Could Be Taxing

Shares of tax preparer H&R Block, Inc. have fluctuated within a range of $25 to $30 for several years. Long-term investors are likely frustrated with the company's underperformance. H&R Block has generated total returns of just 0.1% per year over the past five years, compared with a 10.5% annual return for the broader S&P 500 Index. Even including dividends, H&R Block stock has essentially gone nowhere for five years. This is due to rapid changes taking place in the tax preparation industry, which caught H&R Block by surprise. It is investing aggressively to catch up, but so far, its turnaround efforts have not materialized. Income investors could be tempted by H&R Block's solid 3.7% dividend yield. H&R Block remains highly profitable, which allows the company to maintain its dividend, and even increase it by small amounts from time to time. Taking Account of a Changing Industry H&R Block is a global consumer tax services provider with a market capitalization of $5.7 billion. It offers comprehensive tax return preparation through approximately 12,000 company-owned and franchised H&R Block locations around the world. H&R Block also offers tax software. The company generates annual revenue of more than $3 billion, and prepared over 23 million tax returns in fiscal 2018. H&R Block recently concluded its fiscal year. The company announced financial results for the fiscal 2019 fourth quarter on June 11. It reported revenue of $2.33 billion for the April quarter, down 2.5% year over year. EPS from continuing operations declined 21% for the fourth quarter. Results were similarly weak for the full fiscal year. Fiscal 2019 revenue of $3.09 billion declined 2.1%, while EPS from continuing operations declined 28% to $2.16. Revenue declines were again due to falling revenue in H&R Block's core business, U.S. assisted tax preparation. Revenue decreased 4.5% in this business, which more than offset growth in other areas such as DIY tax preparation services and its Peace of Mind extended service plan. On the bottom line, wage pressure and rising market & advertising expense eroded profit margins, leading to the pronounced EPS declines in the fiscal fourth quarter and full year. Fundamentally, H&R Block's challenge is to adapt to a changing industry. Traditional bricks-and-mortar tax preparers like H&R Block are under pressure from Internet-based tax services such as TurboTax and others. Consumers are opting for the convenience and lower cost of doing their own taxes with software, rather than going into a physical store. This has kept H&R Block in a state of stagnation for the past five years. Revenue of $3,094,881 in fiscal 2019 was only marginally higher than revenue of $3,024,295 in fiscal 2014. Playing Catch-Up To generate higher growth, H&R Block has invested heavily both in organic growth initiatives and M&A. The company has rolled out a wide range of DIY and online services, although they have not moved the needle in a meaningful way to this point. H&R Block has also conducted acquisitions to generate growth. The company recently signed a definitive agreement to acquire Wave Financial Inc. for $405 million, to accelerate the company's exposure to the growing small business segment. These investments will help H&R Block stabilize revenue, but it is unlikely they will be enough to catapult the company back to high revenue growth. H&R Block has ceded the online and do-it-yourself tax preparation space to online rivals, primarily TurboTax. H&R Block will likely remain profitable for the foreseeable future, as the total market is large enough to accommodate multiple players. Everyone needs to prepare their taxes each year, and many consumers will continue to opt for H&R Block's services, thanks in large part to the company's brand recognition and aggressive marketing spending. This is important for investors, as H&R Block's profitability continues to fuel its dividend, which may be the best reason to own the stock. Dividend Analysis H&R Block recently increased its quarterly dividend by 4% to $0.26 per share. On an annualized basis, H&R Block's forward dividend payout of $1.04 per share represents an attractive 3.7% yield. This makes H&R Block an attractive dividend stock, as the broader S&P 500 Index yields just 2% on average right now. As a result, HRB is a suitable stock for investors primarily concerned with generating current income. However, H&R Block is less attractive as a dividend growth stock. Company fundamentals remain challenged, due to the competitive pressures mentioned above. H&R Block has an expected dividend payout ratio of 43% for the upcoming fiscal year. The company continues to be able to afford its dividend, with room for modest dividend increases on occasion. But investors should not expect H&R Block to grow the dividend at a high rate moving forward. Final Thoughts H&R Block is not likely to be viewed as a growth stock any time soon. The rise of Internet-based services has put tremendous pressure on all bricks-and-mortar retailers, and the tax preparation industry is no different. The compnay has been caught off guard by online tax software providers. Its revenue has barely budged in the past five years as a result, without a great deal of opportunities for growth in the years ahead. Investors who care most about high dividend income right now could see H&R Block attractive for its 3.7% yield. But long-term dividend growth investors should probably look elsewhere for stocks with a better growth component.

H&R Block: Solid 3.7% Dividend Yield, But Growth Could Be Taxing

It's a question of income vs. growth with this dividend stock.

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