On Tuesday, tax service provider H&R Block (HRB) announced results for its fiscal year 2012 fourth quarter that were slightly below expectations. The firm earned $1.99 per share vs. the Street consensus of $2.02 per share, while revenue was in line with expectations of $2 billion, even though the company served a record 25.6 million customers.
However, the firm was able to return tremendous amounts of cash to shareholders, as the firm repurchased 1.5 million shares in the fourth quarter and 14.6 million throughout the fiscal year. Further, the firm raised its dividend 33%, and shares now provide investors with an annual yield in excess of 5%.
Tax preparation revenues increased 1.2% for the year, but decreases in revenue from financial services related products tumbled as a result of increases in free refunds for clients using the firm's prepaid MasterCard (MA). Although this increased the number of MasterCard's issued by 24%, it resulted in an overall decline in refund-anticipation-check revenues.
H&R Block is still working through issues related to its discontinued operations, RSM McGladrey and Sand Canyon Corporation. These mortgage operations lost $80 million for the year and currently face over $600 million in claims. The firm's liabilities have weighed on the share price, but we suspect this headwind to disappear when there is more clarity on legislation. H&R Block has nearly $2 billion in cash, so we do not think that even a settlement in excess of $600 million will substantially harm the firm's long-term financial health.
At current levels, H&R Block trades at the low end of our fair value range. Shares yield over 5% annually, the firm is committed to returning cash to shareholders, and we think the company will be able to raise its dividend once liabilities related to RSM and Sand Canyon are clarified.
Perhaps needless to say, history has revealed that the best-performing stocks during the previous decades have been those that shelled out ever-increasing cash to shareholders in the form of dividends, and H&R Block may fit that mold. Unfortunately for the individual investor and time-strapped financial advisor, most dividend analysis that we've seen out there is backward-looking -- meaning it rests on what the company has done in the past: how long it has raised its dividend, etc. One only has to look at the recent financial crisis to understand how rear-view mirror investing could be a recipe for disaster.
That said, we think analyzing historical trends is important, but we think assessing what may happen in the future is even more important. That is why we created a forward-looking assessment of dividend safety through our innovative, predictive dividend-cut indicator, the Valuentum Dividend Cushion™. We use our future forecasts for free cash flow and expected dividends and consider the company's net cash position to make sure that each company is able to pay out such dividend obligations to you -- long into the future. H&R Block registers an impressive 2.5 on our Dividend Cushion, meaning that it can cover future dividends 2.5 times with future cash flow after considering its capital structure. That's very impressive, given the size of its dividend payout. Though we don't hold the firm in either of our actively managed portfolios, we think H&R Block could make an interesting addition to our Dividend Growth Portfolio at the right price.