On Tuesday, tax service provider H&R Block () announced results for its fiscal year 2012 fourth quarter that were slightly below expectations. The firm earned $1.99 per share versus 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 pre-paid MasterCard (). 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. Though we wouldn’t hold the name in the portfolio of our Best Ideas Newsletter, we think H&R Block could make an interesting addition to our Dividend Growth portfolio. The firm currently registers a 4 on our Valuentum Buying Index, so we’d wait for a slightly better valuation and an improved technical assessment before getting excited about the firm.