Avoid H&R Block; Buy US Bancorp Or Fifth Third Instead

 |  Includes: FITB, HRB, USB
by: Dividend Kings

I've been seeing a lot of smaller, niche banks and financial companies that interest me lately. Many of these stocks have been hit hard over the last few years in the wake of the sub-prime scandal and ensuing recession. The smaller regional financials have always been a good place to look for dividends and now is the right time to get in.

Many banks, like Fifth Third Bancorp (NASDAQ:FITB) had limited exposure to the mortgage crisis and were able to maintain ample liquidity through the crisis. Others have been steadily strengthening their balance sheets, divesting bad debts and preparing for future growth. Large cap banks are still not out of the woods in terms of the mortgage crisis. Their corporate images have been damaged, making local and regional banks more attractive to consumers.

Fifth Third and US Bancorp (NYSE:USB) reported increased deposits and account levels. The larger banks, like Citigroup (NYSE:C) and Bank of America, have had to use creative accounting in order to post profits. Most of the revenue reported by Bank of America in 2011 is actually from sales of its stake in a Chinese bank and was offset by billions in charges relating to the mortgage crisis. Who is to say there won't be any further damages?

The large banks are also facing increased challenges from the global economy. The International Monetary Fund has downgraded its 2012 estimates and is predicting a larger than expected impact from the European recession. American based regional banks are insulated, at least somewhat, from international slowing. The US is still expected to grow by about 2.5% in 2012. The recent report of fourth quarter GDP, while weaker than expected, is still in solid positive territory.

The stock market is not expected to do much better than last year. Uncertain expectations of growth, a deteriorating European situation and a trend of lowered guidance has the market set up for some good surprises. Which brings me back to my original point- I like small cap financials. They are cheap, growing revenue, in a solid position to profit from continued and steady US growth and are yielding good dividends. Fifth Third is currently trading around $13 and yielding 2.5%. US Bancorp is currently trading around 1.75%.

While scouring the market for great small cap financials I came upon a surprise- H&R Block (NYSE:HRB). I had no idea it was a bank as well as a tax preparer. H&R Block has some other surprises as well. The company is a bank, a tax preparer, provides business services and is a franchise. It yields a nice 4.8% at the current share prices around $16.50. The company recently increased the dividend by 33%, to an annual rate of $.80 per share. The move came with a statement claiming a commitment to shareholder returns and confidence in the company's financial strength.

The fiscal 2012 second quarter earnings release was disappointing. For the quarter, on-going operations lost $.41 per share, an increase from last years loss of $.36 per share. Despite a growth in revenue of over 4% the company is still struggling with profits. The total net loss in the second quarter increased by 30%. H&R Block lost money in each of its three main categories. Losses in tax services, corporate and discontinued operations totaled over $220 million dollars. Revenue in core business grew over 9% in the second quarter, fiscal 2012, but H&R still managed to increase its loss over last year. Losses from discontinued operations had increased to over $74 million in the first half of fiscal 2012 and account for a full $.25 of total loss in earning per share.

The company has been making steps to increase its core business, tax preparation. Disposal of non-functioning, non-core assets like RSM McGladry and Express Tax is helping H&R Block to "clear the decks for long term earnings growth and improved margins".

In an effort to boost shareholder support H&R Block has also been repurchasing stock, in combination with the dividend increase. H&R block repurchased and retired 4.3% of its shares. The total cost was $177.5 million with an average share price of $13.61. These moves could help bolster support for the stock while it continues to improve operations but it is obvious to me that H&R Block is suffering from more than its discontinued operations. Those losses will come to an end and then the company will still not be profitable. H&R Block must improve core business and bring itself back to profitability. This stock had been trending sideways since before the market crash in 2008 and will most likely continue. It is currently trading around $16.50 and looks weak. Long term support for this stock is in the $10 to $12.50 range and may prove to be the bottom.

Fifth Third Bancorp recently released fourth quarter and full year results. Fourth quarter net income is $.33 per share, down from the third quarter and inline with the previous year. Full year 2011 earnings per share are up 87% from 2010. 2011 numbers included a TARP related credit, discounting that gain the bank's earnings were still up over 60% and the trend is expected to continue. There are several positive highlights from the statement worth mentioning. Net revenue is up and shareholder profits are up, interest income is up, increased deposits and mortgage loans are also up. Improvements to its balance sheet, strong capital ratio and favorable credit trends help solidify Fifth Third's core business. Fifth Third will continue to do well in the coming year and is a much better choice than H&R Block, whose banking business is very limited. Steady growth of the US economy will continue. Fifth Third is in good position to continue growing it revenue and profits.

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