We retain our Neutral recommendation on
H&R Block Inc.
) as a deteriorating debt-to-capital ratio and a fluctuating cash
balance together dwarf the positives. This tax preparer carries a
Zacks Rank #3 (Hold).
Why the Reiteration?
Counting on the positives, H&R Block inked an agreement with
Republic Bank and Trust Company to divest the assets and transfer
the liabilities of H&R Block Bank. The divestiture will allow
the company to free up additional capital, which can be deployed
in strategic opportunities.
Moreover, the implementation of Affordable Care Act will open
revenue generating avenues for H&R Block. Effective Jan 1,
2014, per the Affordable Care Act (ACA), all Americans should
either have health insurance in 2014 or pay a penalty through
their 2014 tax return.
For those choosing to receive subsidized coverage, there will
be a mandatory filing requirement in 2015 to report income earned
during calendar year 2014. Therefore, from fiscal 2015, the
company expects to gain slightly from ACA. Its association
with Go Health will help H&R Block foray into the health
insurance brokerage business.
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H&R Block focuses on various expense reduction initiatives
and seeks to enhance its operational efficiency. It has
successfully captured market share in the digital online category
) for the third consecutive year. It has discontinued the renewal
of its agreement with
) in the United States and agreed with
Sears Holdings Corporation
) to focus on 112 best-performing Sears' locations while shutting
down the rest. Moreover, it has also cut down on workforce in
order to reduce manpower-related expenses.
H&R Block also remained focused to enhance its shareholders
return. H&R Block quarterly dividend of 20 cents per share
yield 3.00%, better than the industry yield of 1.77%. With a
strong financial position, we expect the company to continue to
enhance its shareholder value.
On the tepid side, the performance of H&R Block is tied to
the overall health of the economy. The company has expanded its
operations to Canada, Australia, India and Brazil. Its operations
are therefore subject to changes in trade regulations, profit
repatriation regulations, foreign currency exchange rate
fluctuations, and the economic condition of the particular
country in which it operates.
Additionally, H&R block is experiencing deterioration in the
debt-to-capital ratio. The fluctuating cash position raises
skepticism about the company's ability to engage in deleveraging
activities and thereby improve the debt-to-capital ratio.