The improving U.S. economy is helping more consumers repay their loans on time. That’s pushing down loan losses at a number of U.S. banks, and improving their profits.
However, the outlook for the U.S. banking sector remains uncertain. High unemployment continues to hurt demand for new loans, and the industry faces greater regulations under the Obama administration’s new financial reforms.
Stock investment advice: Diversification is the key to lowering your risk in the U.S. finance sector
While we recommend some high-quality U.S. banks as part of the stock investment advice we offer in our Wall Street Stock Forecaster newsletter, we feel you can cut your risk in this sector by also investing in other types of financial companies, such as mutual-fund and insurance firms, as well.
For example, we updated our buy/sell/hold stock investment advice on tax-preparer H&R Block (symbol HRB on New York) in a recent Wall Street Stock Forecaster hotline.
H&R Block’s predictable tax business makes it less risky than many U.S. bank stocks
H&R Block is the world’s largest provider of income-tax-preparation services. Through subsidiary RSM McGladrey, the company also provides tax-consulting and accounting services to businesses.
As well, H&R Block offers banking services, including chequing and savings accounts, loans and credit cards issued to its tax-preparation clients. But what separates H&R Block from bank stocks is that these activities only account for a small percentage of its revenue.
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Recent purchase strengthens H&R Block’s position in crucial tax-software market
The slow economy and high unemployment are prompting more tax filers to turn to tax-preparation software or free online-processing services. That’s cutting into revenue at H&R Block’s traditional tax-preparation business. As well, the weak economy is hurting demand for its accounting services from businesses.
In response, H&R Block is strengthening its lineup of tax-preparation software. The company recently announced that it is buying privately held 2SS Holdings Inc. 2SS makes the TaxACT income-tax-preparation software.
The company is paying $287.5 million for 2SS. H&R Block held cash of $1.1 billion, or $3.56 a share, on July 31, 2010, so it can easily afford this purchase. The deal should close by the end of 2010.
Adding 2SS will help H&R Block compete with Intuit Inc., maker of the top-selling TurboTax software. The company plans to keep selling both TaxACT and its own H&R Block At Home software packages separately.
Improved customer service and complex U.S. tax code should also help H&R Block
H&R Block continues to work on improving its customer service. That should help it hang onto its current clients. It is also spending more on marketing to attract new customers. Another factor working in the company’s favour is the increasing complexity of the U.S. tax code.
New regulations bring long-term benefits
Like many finance-sector firms, H&R Block is facing tighter regulations: Earlier this year, the Internal Revenue Service (IRS) said it would start regulating income-tax preparers in 2011. This means tax preparers will have to register with the IRS, pass an exam and complete 15 hours of continuing education every year.
These new regulations will increase the company’s costs, of course. But, more important for H&R Block, the new requirements will cut down on competition by spurring old-timers to retire sooner, and persuading part-timers and start-ups to go into some other, less regulated line of work.
You can get our full analysis of H&R Block and dozens of other high-quality companies in the fast-changing U.S. market in our Wall Street Stock Forecaster newsletter. What’s more, you can get the latest issue absolutely free when you subscribe today. Click here to learn how.
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