H&R Block's 4.8% Dividend Yield Giving Off an Odor? Smells Like Opportunity to Fund Manager Yachtman
As tax season draws to a close, most investors will bank their refunds or write their checks and shift their attention to other concerns. But one investor will start paying close attention.
Don Yacktman, a value investor for more than four decades, has selected tax preparer H&R Block (HRB) as one of the “special situation” holdings in his two mutual funds, Yacktman Fund and Yacktman Focus Fund. Yacktman Fund scored an annual return of 9.6% in the last five years, according to first-quarter results. Yacktman Focus Fund returned 10.7 percent in the same period. By comparison, the benchmark S&P 500 returned 2%.
Yacktman’s picks bear watching, not just for his stellar long-term track record but because he doesn’t shy away from controversial companies. In fact, he argues that negative headlines often create the bargains he’s looking for. One of his top holdings is Rupert Murdoch’s News Corp. (NWSA). Another holding, Apollo Group (APOL), operates for-profit schools, an industry stuck in controversy about dodgy student loans and student performance.
In H&R Block’s case, critical stories about tax refund lending, a questionable mortgage business and other adventures beyond its core business accompanied declining revenues and earnings per share in the last three fiscal years. Online competition, including Intuit’s Turbo Tax software (INTU), remains a challenge.
The current fiscal year, ending April 30, is the first under new H&R Blocks’ CEO, William Cobb, who sold off non-core businesses, cut back on the number of retail tax preparation offices and boosted spending on promoting tax-prep service. Block offers free filing of simple, Form EZ, tax returns. In January, the company boosted its quarterly dividend to 20 cents a share from 15 cents. H&R Block’s dividend yield is above 4.5%.
This all sounds good to Yacktman. He likes companies with a strong franchise, such as the nation’s largest tax preparation service. He worries less about H&R Blocks’ growth prospects. One of his favorite metrics is earnings yield, which is the reciprocal of the more popular price-earnings ratio. Earnings yield measures the percentage of earnings from each dollar invested. In Yacktman’s view, strong cash flow and a generous earnings yield makes up for a lot of controversy and competitive threats.
Filed under: Company Analysis