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H&R Block: A Potential Value Trap

|Includes: H&R Block Inc. (HRB)
H&R Block is a good example of why cheap dividend plays aren't always cheap.

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There is high interest in high dividend stocks, because equities are providing their strongest yields in 15 years relative to bonds.
And there is some renewed interest in H&R Block, after it reported better-than-expected earnings this month. Its P/E is now 7.8 times, way lower than any of its peers, and far below the stock's historical average.
Tax and business services stock valuations:
Company                            F 12 mos P/E
H&R Block                          7.8
Intuit                                     18.3
Cintas                                   17.2
Iron Mountain                  16.1
Source: StarMine Professional
It also scores in the top-decile of all North American stocks based on StarMine relative value and intrinsic value metrics. North American stocks rose about 15 percent in the six months after they reached an intrinsic value score of 90 or above.
H&R Block StarMine Valuation (100 is best):
Relative Value:                  95
Intrinsic Value:                 96 (highlight)
Source: StarMine Professional
Meanwhile, Block's stock is technically oversold. 
(See HRB chart, attached, also TI is attached as the Excel numbers)
Here you see relative strength, in orange at the low extreme. Meanwhile, our Trend Intensity signal, in blue, is very high, reflecting that the downtrend is mature and could end in coming months.
The added attraction is that HRB's dividend yield is 4.6 percent, far greater than any of its tax services peers and more than double the S&P average.
Dividend Yield:
H&R Block:                          4.6%
Intuit                                     0%
Cintas                                   1.7%
Iron Mountain                  2.0%
S&P 500 Average:           2.1%
Source: StarMine Professional
But when you do some extra homework on the credit side in Reuters 3000 Xtra, there are red flags that say Block is still a risky long play, and a potential value trap.
Here's why:
Of top dividend payers in the U.S, H&R Block has one of the highest 5-year CDS premiums relative to the sector/rating average to its triple B-rated peers.
Company                                            Premium in BPS to peers
H&R Block                                           199
R R Donnelley                                     124
CenturyLink                                        89
Altria Group                                       44
Source: Reuters CreditViews
And it's recently taken a turn for the worse in the past month. It's CDS price spiked relative to its peer group.
H&R Block CDS:
1 Month price change: +50%
3 Month price change:  +109%
Source: Reuters CreditViews
And last week, its default probability spiked, according to the Kamakura model in Reuters CreditViews.
Increasing Kamakura Default Probability, 30 days:
Company                                            Default Probability%                      Change
H&R Block                                           0.28%                                                    +0.14%
Another potential red flag is H&R Block's Z spread. It's on the rise, which can be an indication of rising liquidity and credit concerns.
Companies with Large Z Spread Increases in the Past Month:
RPM International                           30%
H&R Block:                                         21%
Source: Reuters CreditViews
Here is part of what the credit markets appear to be concerned about:
There's been a lot of turnover at H and R Block. Over the summer, the company's CEO, CFO, its general council, and board member Thomas Bloch, all left the company.
Since that time, Alan Bennet has been appointed CEO.
And the new boss is staring down a lingering problem from the subprime mortgage heyday -- mortgage pubacks.
In recent months, worries have increased that more mortgage issuers could forced to buy back mortgages they generated, due to breches of warranties and legal representations.
They cover things like income documentation and property appraisals.

Disclosure: none