Take Advantage of H&R Block Dividend With Bearish Collar

| About: H&R Block (HRB)

H&R Block’s (NYSE:HRB) “black Friday” doesn’t come the day after Thanksgiving like a lot of businesses, but rather, is a result of “Tax Day” which is typically on April 15th, but due to April 15th falling on a Sunday in 2012, Tax Day is on April 17th in 2012. In its Q2 2012 earnings conference call, H&R Block reported a $0.41/share net loss from continuing operations, which is not uncommon for the company outside of tax season. The company also indicated it disposed of some non-core assets with the sale of its tax-consulting firm RSM McGladrey and the shuttering of its ExpressTax franchise business. The company is proposing the remnants of ExpressTax join H&R block.

The company is also dealing with problems related to its mortgage subsidiary Sand Canyon, which experienced a spike in claims related to bad loans written by its shuttered subprime mortgage unit. The claims increased to $483 million during the quarter, but the company dismissed the issue somewhat by noting that 85% of previous claims have been found to be invalid. I’m not so sure the dismissal is warranted, as 15% of $483 million is $72.5 million, which is pretty sizable chunk of change. H&R Block assured during the conference call that the company is shielded via corporate veil from issues related to Sand Canyon. The company indicated it renewed its partnership with Wal-Mart Stores (NYSE:WMT), and will have approximately 300 offices located in Wal-Mart stores this year. In the conference call, the company indicated it is focused on growing market share and its number one priority is client growth. This also struck me as off-target, as I would think the company’s number one priority should be to serve its current customers well. H&R Block’s competitors include Intuit (NASDAQ:INTU) and Jackson Hewitt Tax Service (private). Intuit offers QuickBooks financial software services and TurboTax tax preparation products and services. H&R Block’s stock price has been stuck in a trading range from $11 to $17.50 over the last year as shown below: Click to enlarge H&R Block announced it increased its annual dividend by 33% to $0.80. It also announced its next divided of $0.20 per share is payable on January 5, 2012 to shareholders of record as of December 22, 2011 with the ex-dividend date being December 20, 2011. With H&R Block’s upcoming dividend and the Sand Canyon black cloud overhead, an investor might consider a bearish in-the-money collar for the company's stock. The bearish in-the-money collar is a reverse of a typical collar as the position is bearish and the options are in-the-money. A bearish in-the-money collar may be entered by selling an in-the-money call option against a purchased or existing stock and purchasing an in-the-money put option. Using PowerOptions tools, a bearish in-the-money collar was found with a potential return of 8.5% and a maximum potential loss of 5%. The potential return for the stock price being unchanged on the ex-dividend date is estimated at 1.2%. The returns and losses were calculated assuming receipt of the $0.20 dividend payment. The call option to sell is the 2012 Jan 14 at $1.72 and the put option to purchase is the 2012 Jan 16 at $1.22. The prices for the options were calculated at midway between the bid/ask spread, so this position should be entered with a net debit to receive the $1.72 price for the call option and the $1.22 price for the put option. A profit/loss graph for the bearish in-the-money collar is shown below: Click to enlarge

With H&R Block handcuffed to Sand Canyon, the company’s stock price does not appear to be positioned for appreciation in the near term and maybe for the long term, so the bearish in-the-money collar provides protection in case the stock price increases significantly, yet provides a potential profit if the company’s stock price remains unchanged or drops in price. To receive the $0.20 dividend, the stock should be held at least until the ex-dividend date of December 20, 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.