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H&R Block welcomes U.S. health care reform with open arms

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For most companies, U.S. health care reform is a decidedly mixed blessing but, for one, it is a source of undiluted glee. Shares in H&R Block, which prepares tax returns, have taken off, rallying nearly 60 per cent this year to rank as the third best performer in the S&P 500. The chief catalyst? Enthusiasm about opportunities created by the Affordable Care Act, legislation aimed at decreasing health costs and the number of uninsured.

Specifically, health care reform could increase the pool of people that file tax returns. The Congressional Budget Office and the staff of the Joint Committee on Taxation estimate that in 2016, there will be about 30 million non-elderly uninsured. Some portion do not already file tax returns but could start in order to qualify for health care subsidies.

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Meanwhile, any added complexity in the tax system typically drives filers to the "assisted market," where a person helps to prepare the return and where H&R Block is the biggest single player, with an 18-per-cent share. Additional paperwork related to the new rules, if there is any, could boost pricing and there is also the possibility of immigration reform that would further increase the number of filers.

Tax preparation is a competitive business dominated by mom-and-pop operations. While H&R Block has been able to gain market share in recent years, an increase in the number and complexity of tax filings introduces a new element of growth. This justifies some premium for the shares and, at $29 (U.S.), H&R Block trades at 15 times next year's earnings, not too far above the 10-year average of 13 times. There are, however, unanswered questions, such as just how many of the uninsured seeking subsidies do not already file tax returns and whether H&R Block will be the one that succeeds in winning their business.

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