H&R Block: Taxing returns

Tax season, and potential changes to the tax code, bode well for this tax preparation firm.

By TheStockAdvisors Feb 4, 2013 11:31AM
Tax forms CorbisBy Chuck Carlson, DRIP Investor

One certain result of the political horse-trading now in full swing in Washington is a change to the tax code. And depending on negotiations, the changes could be extensive.

One firm that could benefit from yet another tax overhaul is H&R Block (HRB). The company is one of the world's largest tax-services providers. And the stock is a holding in our Editor's Portfolio.

Block's reach is impressive:
  • Block prepares one in every seven U.S. tax returns.
  • The firm has a retail office within five miles of most Americans.
  • Block files one in every five Earned Income Tax Credits.
The stock has performed well of late and is trading around its 52-week high. Wall Street no doubt believes that changes to the tax code will fuel increased demand for the company's services.

Block stock is also benefiting from improved results in recent quarters. The firm has beaten Wall Street's consensus earnings estimates in each of the last two quarters.

For fiscal 2013 ending in April, the consensus profit estimate is $1.68 per share, up from $1.28 in the year earlier. Growth should continue in fiscal 2014, with the current estimate of $1.82 per share.

The stock is also benefiting from investors' thirst for dividends. H&R Block stock currently yields more than 4%.

Despite the hefty yield, the annual indicated dividend of $0.80 per share seems well covered by earnings. In fact, a dividend hike would not be surprising in 2013.

Block stock has had its ups and downs over the years. The firm's foray into mortgages ended rather badly, which hurt these shares. The stock traded in the $30s in 2004 and 2005 and the high $20s in 2008, so the shares have plenty of upside potential.

Also enhancing potential is the takeover prospects of the company, although these shares have merit even if no takeover develops.

Because of the stock's volatile track record, these shares are not for conservative investors. But more aggressive investors looking for a nice combination of yield and growth potential, not to mention a stock with some interesting catalysts in 2013, should give these shares special consideration.

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