Tax preparation company H&R BLOCK INC (NYSE:HRB) has appeared as a candidate for quality investors through the use of the Caviar Cruise stock screening method. This approach is focused on finding companies with lasting competitive strengths, high profitability, and sound financial condition, appropriate for long-term, buy-and-hold investment portfolios. The screen stresses measurable numbers that indicate a business of high standard, concentrating on past performance, effective capital use, and the nature of earnings.
Profitability and Capital Efficiency
A central part of the Caviar Cruise strategy is high profitability and a notable return on invested capital (ROIC), showing a company's capacity to produce high profits from its operational assets. H&R Block displays notable strength in this area, with a ROIC excluding cash, goodwill, and intangibles of 146.48%. This number is not just good; it is outstanding, showing that the company produces great value from the capital actually used in its main operations. Furthermore, the company's EBIT has increased at a compounded annual growth rate (CAGR) of 35.23% over the past five years, greatly exceeding the screen's 5% minimum requirement and indicating strong growth in its core earnings.
- ROIC (Ex Cash+GW): 146.48%
- EBIT Growth (5Y CAGR): 35.23%
- Profit Margin: 16.10% (outperforms 87% of industry peers)
Financial Health and Earnings Quality
The Caviar Cruise method places a solid focus on financial strength, examining debt levels and the nature of reported profits. H&R Block shows a careful approach to debt management, with a Debt-to-Free Cash Flow ratio of 3.01. This falls well within the screen's acceptable range of below 5, suggesting the company could theoretically pay off all its outstanding debt in just over three years using its current cash flow, indicating a manageable debt load. Perhaps even more convincing is the company's profit quality. The screen looks for companies that convert at least 75% of their net income into free cash flow over a five-year period. H&R Block far exceeds this, with a five-year average profit quality of 116.11%, meaning it generates more cash flow than its accounting net income, a sign of high-grade, sustainable earnings.
- Debt / Free Cash Flow: 3.01
- Profit Quality (5y Avg): 116.11%
Valuation and Shareholder Returns
While pure value investing is not the goal of quality investing, paying a fair price for a great business is still important. H&R Block seems attractively valued, trading at a Price-to-Earnings (P/E) ratio of 9.42, which is a discount to both the industry average and the broader S&P 500. This valuation seems attractive when considered next to its high profitability. For income-focused quality investors, the company also offers a solid dividend, with a yield of 3.75% that exceeds its industry peers. The dividend has a dependable history of growth and sustainability, supported by a low payout ratio.
- P/E Ratio: 9.42 (cheaper than 85% of industry)
- Dividend Yield: 3.75%
- Dividend Growth (Avg. Yearly): 6.79%
Fundamental Analysis Summary
A review of the detailed fundamental report for H&R Block gives it an overall rating of 6 out of 10. The report notes an "excellent profitability rating" and an "excellent dividend rating," which fit well with the quality investing framework. The main point of caution mentioned is in the company's financial condition, mainly due to liquidity ratios (Current and Quick Ratio) below 1, which investors should watch. However, this is viewed alongside strong solvency metrics, including a good Altman-Z score and the previously mentioned manageable debt level. Growth is a mixed picture, with strong historical EPS growth but more moderate revenue growth expectations for the future.
Conclusion
Based on the specific, measurable filters of the Caviar Cruise screen, H&R Block presents an attractive case for quality investors. The company displays outstanding returns on capital, solid and increasing operational earnings, high-grade cash conversion, and a shareholder-friendly dividend policy, all while trading at a fair valuation. The screen effectively identifies companies with these fundamental quality characteristics, allowing investors to perform further due diligence on the less measurable aspects, such as competitive position and management skill.
For investors interested in finding other companies that pass this strict quality screen, you can view the complete and updated list of Caviar Cruise results here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an offer to solicit any transaction. All investments involve risk, including the possible loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
