In case you missed it, today is tax day! If you are only too aware of that fact, the chances are that, like me, this is also the day when you write a check to Uncle Sam. Human nature dictates that most of those whose tax returns result in a refund will have filed as soon as their last W2 or 1099-DIV arrived, while those of us who do not have taxes deducted from a paycheck are far more likely to delay until the last minute.
Writing a check or making a large electronic transfer to the IRS is not something that any right minded person would do before it was absolutely necessary, but doing so brings certain things into focus. For some reason, parting with a sum of money in a lump sum rather than in the form of regular deductions makes people much more aware of the government’s spending priorities, and tax policy moves from the obscure to the relevant.
Much has been said and written about possible tax changes under this administration, but one word keeps coming up: simplification. Each time that is mentioned I am sure it sends a wave of fear through the board at companies like H&R Block (HRB) and their investors.
The U.S. tax code is complicated, infuriating, and at times, seemingly senseless, but there is a massive industry that has grown up around those very traits. Simplification of the tax code is that rare thing in modern politics, a logical idea that appeals to both parties, but it would not come without disadvantages.
Help with tax preparation of some kind, whether from full service companies like H&R Block or online software such as Turbo Tax by Intuit (INTU) is, according to IRS numbers, sought by around ninety percent of U.S. taxpayers. It is little wonder that help is needed given that the IRS themselves estimate that it will take fifteen hours simply to fill out a 1040.
The cost of that time, along with the money paid to preparers is, depending on your preferred source, anywhere between $200 billion and $450 billion.
Either way, it’s a lot.
In the long term, tax simplification would be an enormous benefit to the U.S. economy; that $300 billion or so represents a massive amount of capital that is essentially being wasted. It does, however, fuel an industry, and in the short term there would be quite severe dislocation if that industry were to be essentially legislated out of existence.
Of course, that has been a desirable change for a long time but nobody has yet managed to achieve it. Rather, as each successive interest group gets its own pet exemption or tax on its competition, the Gordian knot of the tax code pulls ever tighter.
Many are hoping that President Trump can be the one to turn that around. He was elected on a platform of change to the established order, and nothing says entrenched interest like a tax code designed to pick winners and losers in the economy. Whether he will be able to do anything about it remains to be seen, but at some point before too long change has to come.
Fifteen hours or hundreds of dollars spent to simply calculate your taxes is ridiculous and as taxpayers become increasingly frustrated, they will begin taking that frustration out on their elected representatives, making real reform much more likely.
That is what convinces me that HRB is a stock without a future. Sure, the company has diversified somewhat into payroll services and business consulting, but a glance at their quarterly EPS tells you everything you need to know about that. The pattern of one profitable quarter subsidizing three losing periods is very much intact and forces you to wonder what will happen when the cash cow of complicated returns is slaughtered by a Congress fearful for their jobs or by a President looking to make an impact.
Even if that day never comes, HRB has a problem. With 90% of taxpayers now using help with tax preparation, there is no room for the market to grow. But judging by TV ads currently running, competition in the space is intense. The stock does pay a respectable 3.63% yield but the prospect of flat revenue (at best) from its major business makes the long term sustainability of that yield questionable. Even if that were to be maintained, the real value of the yield will fall as the Fed increases interest rates.
On this of all days I tried to think of something positive to write about, but as I contemplated taxation and the business of tax preparation, that became impossible. It is possible that H&R Block could squeeze out some competitive advantages and increase profit this year, but the deeper you look at the situation, the more it seems that HRB has a long term problem and that makes the stock one to be avoided.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.