2023-07-05 06:52:44 ET
Summary
- H&R Block has shown strong performance over the past five years, with shares gaining 38.49%, despite a recent 11% decline due to macroeconomic factors.
- The company has initiated a transformative journey to improve customer experience and manage long-term growth, focusing on small businesses, financial products, and innovative consumer tax approaches.
- HRB has a strong commitment to shareholders, demonstrated through share buybacks and dividend payments, and is currently trading at an attractive price with a PE ratio of 10.74.
Investment Thesis
H&R Block, Inc. ( HRB ) specializes in tax preparation, financial products, and small business solutions. The consumer services provider has shown remarkable performance over the past five years and has the ability to continue this trend in the near future. Over the last five years, its shares have gained 38.49%. Its shares have plummeted by about 11% in the last year, but I attribute this decline to the harsh macroeconomic climate characterized by historically high inflation rates.
However, these headwinds are temporary, and I expect them to subside in the near term. Besides easing macroeconomic headwinds, the company has transformative strategies that I believe will fuel its long-term growth. Further, HRB has exhibited its commitment to shareholders through share buybacks and dividend payments. In the wake of my optimistic outlook about the company, I think it is a good investment.
HRB Competitive Advantage
HRB has a significant presence in the tax preparation industry due to its lengthy relationship with customers and commitment to service. Once a tax service has your financial information, it's easier for the customer to use the same tool to file taxes again. In this way, customers can be said to have relatively high switching costs .
HRB can also use its reputation as a trusted low-cost advisor to get strategic partnerships, as it did with Shopify and Walmart. Regarding market share, HRB is behind Intuit, mostly because they were slow to move into the digital space. As HRB continues putting more money into its digital presence, I think the company's market value would increase.
A Transformative Journey In Progress
HRB began a transformative journey in 2021 to improve customer experience and manage the company's long-term growth. The company's five-year development and transformation strategy is centered on three imperatives : small business, financial products, Block experience, and H&R Block's innovative consumer tax approach.
- Small Business: It will concentrate on small business taxation while growing its payroll and bookkeeping services for small business owners.
- Financial Services: It was to develop a mobile-first solution that instills financial trust in customers and helps them manage their finances.
- Global Consumer Tax: The goal was to integrate all consumer tax and service delivery processes, including the company's expert-prepared-aided tax solutions, do-it-yourself [DIY] tax options, and overseas and expat business.
While some of these measures have been implemented, the company is currently engaged in significant activities that I believe are in accordance with the company's transformative goals. The most recent ones are managerial changes and collaboration with Microsoft.
1. Management Change
As the firm continues its transformation strategy, it has appointed four new Vice Presidents to drive in-market operational excellence while bolstering growth. Jason Mann and Tony Bisbiglia have been promoted to vice presidents of Central Market's retail sales and service and West Market's retail sales and service, respectively. Shilpi Pathak has been elevated to Vice President, Go-to-Market Strategy, replacing Wendy Fitch, who has been named Vice President, Brand, Content, and Insights.
Tony Bisbiglia: Tony has been promoted to Vice President of Central Market Retail Sales and Service, reporting to Mark Darling, Senior Vice President of US Retail Operations. He will be in charge of seven Central Market regions, as well as guiding field leadership and implementing projects that encourage company growth and enhance the customer experience at H&R Block. Bisbiglia worked as a retail executive for Toys "R" Us for 14 years before joining H&R Block as a Regional Director in 2018.
Jason Mann: Mann will be in charge of eight regions in the West Market. His primary focus will be guiding field leadership to enhance client trust at H&R Block offices throughout the territories he manages. Jason has had a variety of positions since joining the organization in 2005. His previous experience includes McDonald's field leadership.
Wendy Fitch: Fitch will be in charge of brand design and activation at H&R Block, including strategy, creative platform, architecture, and vision. She will also be in charge of content generation. Fitch has been the Director of Advertising and Social Media at H&R Block for the past seven years, playing an important role in managing brand efforts as the company continues to develop.
Shilpi Pathak: Pathak will focus on the company's Global Consumer Tax and Block Advisors brands, focusing on business accountability from planning to execution. Shilpi joined H&R Block in 2019 and worked as a Marketing Programme Director for two years before being promoted to Director of Marketing Strategy, Small Business.
Looking at these appointments, I am quite excited because of their extensive work experience, which I believe will be critical to the company's success. Furthermore, having worked for the company for some time, I believe they understand it and its needs, so I am confident they will deliver on its objectives and revolutionary agenda.
2. Partnership With Microsoft
The company announced its partnership with Microsoft ( MSFT ) to use Azure OpenAI services and top generative AI technology to create faster and more consultative tax experiences, unlocking new levels of innovation to inspire even more trust in Block customers throughout tax season.
HRB is the only tax firm chosen by Microsoft to be a part of its AI 100, an elite group of industry-leading organizations that prioritize the development and deployment of solutions using Azure OpenAI services. H&R Block gains access to the most advanced AI models in the world while maintaining a focus on data security with this latest move to usher in speedier ways to give tax services at scale.
AI technology increases efficiency and unleashes the creativity of H&R Block's engineers to create innovative solutions that give more dynamic, humanized, and personalized product experiences at scale. Thousands of machine learning models trained on millions of tax returns, AI algorithms, and generative AI technology will all play important roles in developing more robust real-time advising and efficient filing processes. The announcement is the latest illustration of HRB's long-term growth and transformation plan, which includes challenging the tax industry.
Investors' Corner
Aside from expansion, HRB has a reputation for being devoted to its shareholders through dividend payments and share buybacks. The company's dividend growth history spans seven years, exceeding the industry average of one year. Furthermore, it has paid dividends for 33 straight years, compared to the industry average of three years, making this company a dependable income choice for dividend investors.
Given the firm's revolutionary goals, which I believe bodes well for the company's future growth, I expect the dividend momentum to continue, making the company a good dividend pick for potential investors.
In addition, the corporation has returned capital to shareholders through share buybacks. The company has about $900 million left on its most recent $1.25 billion share repurchase authorization, valid through fiscal year 2025. Since 2016, the company has returned more than $3 billion to shareholders through share repurchases and dividends, repurchasing more than one-third of its outstanding shares. Looking at these programs, the company is committed to its investors, and therefore I recommend it to potential investors.
Valuation
This company seems to be trading at an attractive price based on relative valuation metrics. It has a PE ratio of 10.74 which is 35.69% lower than the median average of 16.71. This shows that the company is trading at a discount. Further, a dcf model by finbox lends credence to this valuation by estimating a fair value of $51.82 and an upside potential of 60%.
Given the discounted price, I think potential investors to leverage the low entry point and board this promising company. Through its promising transformative growth initiatives, I believe it can exploit its upside potential. This growth will also reflect in its TRS since its dividends will grow.
Conclusion
In conclusion, I find this company attractive, given its low entry point and promising transformative agendas. I think HRB is a good pick for both growth and dividend investors.
For further details see:
H&R Block: An Attractive Dividend And Growth Stock