EXECUTIVES of H&R Block are faced with this dilemma: The company is better off if its stock stays low, at least for the time being.
It’s heresy, of course, for a company to admit that. But guess what? H&R’s Chairman Mark Ernst is willing to break Wall Street’s heart.
The problem is that H&R Block has a subsidiary called Option One Mortgage, which caters to people who might not be able to get a mortgage at a regular bank.
That business throws off a lot of extra cash, $400 million to $500 million a year by the company’s own estimate.
Despite the windfall, Option One doesn’t really fit into H&R’s corporate strategy. So it was put up for sale a few years back, but Ernst says the offers came in too low.
So, H&R Block now finds itself in the unusual position of having a very profitable business that it really doesn’t need.
And all that extra cash is simply being used to repurchase H&R stock on the open market.
But there’s more.
Ernst said in a recent interview that Option One also provides the added benefit of keeping H&R Block’s stock depressed because Wall Street analysts don’t like it.
Follow?
Because the H&R’s stock price is being kept down by owning Option One, all that Option One cash can buy more stock than if H&R’s stock price wasn’t depressed.
Whew!
The natural follow-up question is: By keeping Option One, is H&R Block intentionally keeping its stock down so its share repurchases won’t be so expensive?
That begs the question of whether it would be sold if a buyer comes looking. What about spinning it off to shareholders?
“The only time spinning off a business makes sense is when it is truly reflected in the stock price,” he says – which, of course, Ernst says, Option One isn’t.
Ultimately, Ernst reasons, H&R Block shareholders will benefit more from the stock buybacks and share prices will reflect the odd corporate strategy.
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Washington is already a week and a half late in publicizing the nation’s wholesale price increases for January.
The figure was supposed to come out Feb. 19. The Bureau of Labor Statistics says it still doesn’t have a release date because of “conversion” problems caused by reclassification of some products.
And a government economist swears to me that the delay isn’t because the Producer Price Index number was awfully bad.
“Nobody has seen the number,” one of the PPI’s economists said.
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Liberty Media Corp. has Wall Street’s attention.
A number of small but strategic deals by the company in recent months has at least one Wall Street firm, Natexis Bleichroeder, thinking that Liberty is planning to split itself up into four different companies along regional business lines.
In its current situation, Liberty runs the risk of being considered an investment company for tax purposes, a less favorable position than if it is an operating company.
So Wall Street has been long jabbering about how Liberty needs to pick up some ongoing businesses.
Bleichroeder analyst Robert Routh told clients this week that “we think Liberty is still considering breaking up” into four companies “to facilitate future transactions.”
A Wall Street source of mine with knowledge of Liberty says the company hasn’t yet decided on a plan. “There are a lot of conversations on a lot of different fronts,” the source tells me.