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We retain our Neutral recommendation on H&R Block Inc. (HRB - Analyst Report) as a deteriorating debt-to-capital ratio and a fluctuating cash balance together dwarf the positives. This tax preparer carries a Zacks Rank #3 (Hold).

Why the Reiteration?

Counting on the positives, H&R Block inked an agreement with Republic Bank and Trust Company to divest the assets and transfer the liabilities of H&R Block Bank. The divestiture will allow the company to free up additional capital, which can be deployed in strategic opportunities.

Moreover, the implementation of Affordable Care Act will open revenue generating avenues for H&R Block. Effective Jan 1, 2014, per the Affordable Care Act (ACA), all Americans should either have health insurance in 2014 or pay a penalty through their 2014 tax return.

For those choosing to receive subsidized coverage, there will be a mandatory filing requirement in 2015 to report income earned during calendar year 2014. Therefore, from fiscal 2015, the company expects to gain slightly from ACA.  Its association with Go Health will help H&R Block foray into the health insurance brokerage business.

H&R Block focuses on various expense reduction initiatives and seeks to enhance its operational efficiency. It has successfully captured market share in the digital online category from Intuit Inc. (INTU - Snapshot Report) for the third consecutive year. It has discontinued the renewal of its agreement with Wal-Mart (WMT - Analyst Report) in the United States and agreed with Sears Holdings Corporation (SHLD - Analyst Report) to focus on 112 best-performing Sears’ locations while shutting down the rest. Moreover, it has also cut down on workforce in order to reduce manpower-related expenses.

H&R Block also remained focused to enhance its shareholders return. H&R Block quarterly dividend of 20 cents per share yield 3.00%, better than the industry yield of 1.77%. With a strong financial position, we expect the company to continue to enhance its shareholder value.  

On the tepid side, the performance of H&R Block is tied to the overall health of the economy. The company has expanded its operations to Canada, Australia, India and Brazil. Its operations are therefore subject to changes in trade regulations, profit repatriation regulations, foreign currency exchange rate fluctuations, and the economic condition of the particular country in which it operates.

Additionally, H&R block is experiencing deterioration in the debt-to-capital ratio. The fluctuating cash position raises skepticism about the company’s ability to engage in deleveraging activities and thereby improve the debt-to-capital ratio.

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