H & R Block builds a future in diversified financial services
Kansas City, Mo.
For 28 years, H & R Block Inc. has existed in innocence and harmony reminiscent of a William Blake poem: ''Lions live like lambs.'' Without fanfare, it has built up an income-tax preparation business that stretches to embrace 9,073 offices worldwide. But the cash cow is maturing and now ''the income tax people'' seem to have one thing on their mind - growth through diversification.
Block started shifting gears back in the late 1970s, when Henry W. Bloch, president and chief executive, saw the handwriting on the wall. In 1978 the company acquired Personnel Pool of America Inc., now the largest proprietary home health care agency and, overall, the third largest provider of supplemental personnel in North America.
Two years later, H & R Block snapped up CompuServe Inc. and as a result has a firm toehold in the fast-paced computer services business. Also, in 1980 Block founded Block Management Company, which furnishes administrative and marketing services to Hyatt Legal Services.
In diversifying, Block has steered clear of any big acquisition. Rather, its strategy is to nurture small companies into dominant positions in their respective fields, drawing on Block's expertise in service-oriented businesses.
''We've looked at a lot of companies. We are extremely particular,'' Bloch says. ''We've made some mistakes, too. We've let some companies get away that have turned out well. But we've avoided errors by not acquiring some companies that have not performed well.''
So far, it's worked. Without question, home health care, computer services, and legal services are three of the fastest growing industries in the United States.
Meanwhile, HRB's profits increased 5.6 percent, to $40 million in fiscal 1983 , ended April 30, on revenues that rose to $341 million, a gain of 71 percent over the year-ago period. Return on average equity topped 21 percent, and the company's stock now sells at an earnings multiple of 11.7 times estimated 1984 earnings of most analysts who track the company.
H & R Block's major market, its tax-preparation business, is maturing. Since the mid-1970s there has been a steady decline in the number of US taxpayers seeking professional help. In the US, Block- prepared returns declined 3.1 percent in fiscal 1983 due to high unemployment.
More taxpayers are either preparing their own returns, not filing returns because they are jobless, or turning to the Internal Revenue Service. In its last fiscal year, H & R Block reported decreases in both the number of simpler returns (Forms 1040A) and more complex returns (Forms 1040) prepared. However, slight progress is being made in the overseas market, especially Canada, where a new refund discount program enabled the company to reach break-even operations last fiscal year.
A more immediate threat may come from the introduction of Form 1040EZ, a simplified short form for single taxpayers, which has led many to self-preparation. And not even an average 5 percent price hike last year was enough to stem declines in Block's return on operations.
All this explains why many observers believe any future growth is likely to come from other operations. As sales and earnings of subsidiaries grow, these companies are starting to contribute a larger portion to Block's bottom line.
Jan H. Loeb, an analyst at L. F. Rothschild, Unterberg, Towbin, estimates that the nontax business could increase its percentage of HRB's earnings from 13 .7 percent in fiscal 1983, to 28.7 percent by fiscal 1985.
Right now those divisions are experiencing some troubles. The recession has ground down sales at Personnel Pool of America, the Fort Lauderdale, Fla., subsidiary. Its two divisions - Personnel Pool and Medical Personnel Pool - together chipped in $43 million in revenues last year, or a 6.7 percent hike over the previous period, but earnings dipped.
Analysts expect growth of about 30 percent annually at CompuServe, a leading provider of videotex services based in Columbus, Ohio. It has 77,000 subscribers coast to coast. This optimism stems from the fact that on-line database publishing, already a $1.2 billion-a-year industry, is growing by leaps and bounds.
Excitement aside, few are making much money in this glamour business, and broader services such as CompuServe and Reader's Digest Source Telecomputing are hovering near break-even.
Normal startup costs are part of the problem. Most of CompuServe's 34.5 percent pretax earnings decline last fiscal year was due to expansion of the company's telecommunications network and increased promotion of the CompuServe Information Service.
But H & R Block is also suffering from decreased demand for the new technology and increased competition, which has caused a stampede into the market. Including the Dun & Bradstreet division of McGraw-Hill, there are now some 20 major players, and new competitors are entering the market regularly.
None of this ruffles Jeffrey Wilkins, CompuServe's president. ''Those investments are behind the company!'' he said. ''While continued expenditures will be made in the promotion of the service and expansion of the network, revenues have improved so that margins have returned to the healthy range.'' Some observers project that CompuServe's earnings will double in fiscal 1984.
Meanwhile, Block Management Company, which lost $4.5 million in fiscal 1983, has turned into the company's fastest growing segment, albeit the smallest. At fiscal year-end, it was providing services through 249 lawyers to 117 Hyatt Legal Services' offices in 17 states and the District of Columbia. As a result, Hyatt Legal Services has emerged as the largest personal-services firm in the country, and analysts look for more than 40 percent annual growth in the division.
H & R Block doesn't lack for resources to continue to diversify. The company has nearly $12 per share in cash and marketable securities. With debt at a mere 4 percent of capital, Block should reach for its own pocketbook.
Says Loeb: ''If they make an acquisition, it will just accentuate the fact that they are in different areas and will increase the subsidiaries' contribution to Block as a whole.''
H & R Block earned $3.34 per share in fiscal 1983 and in the first quarter of its current fiscal year. Both PPA and CompuServe had big profits. Looking ahead, analysts project earnings in the range of $3.80 to $4 per share for fiscal 1984, and $4.45 to $5 per share for fiscal 1985.
''We're well positioned for the future,'' sums up Bloch.