Look beyond bank stocks for U.S. finance-sector profits

Some U.S. bank stocks have reported improved profits lately. And many banks have repaid some or all of the loans they received under the U.S. government’s Troubled Asset Relief Program (TARP) in 2008. That frees these bank stocks from government control, and improves their long-term prospects.

However, the U.S. banking sector remains highly volatile. As well, the industry could face greater regulation and higher costs if the Obama administration moves ahead with its reform plans.

For example, Senate Banking Chairman Christopher Dodd recently released a bill that proposes to tax the largest bank stocks and financial institutions. The proceeds would be used to support a $50-billion U.S. fund aimed at dealing with failing banks and financial firms in the future.

Diversification is the key to lowering your risk in the U.S. finance sector

While we recommend some high-quality U.S. bank stocks 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.

In the current Wall Street Stock Forecaster, we update our advice on six non-bank U.S. finance-sector firms that come from all corners of the industry. One of these companies is tax preparer H&R Block (New York symbol HRB).

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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. It operates 11,506 offices in the U.S. (38% owned by franchisees), as well as over 900 offices in Canada and more than 370 in Australia.

Through subsidiary RSM McGladrey, H&R Block 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.

Improved customer service and complex U.S. tax code should help H&R Block

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, the company is working 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 H&R Block’s favour is the increasing complexity of the U.S. tax code, which should let the company keep raising its fees.

New regulations provide long-term benefits

Like many finance-sector firms, H&R Block is also facing tighter regulations: In January 2010, 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 special analysis (including our clear buy/sell/hold advice) on H&R Block and five other firms from the U.S. finance sector in the latest Wall Street Stock Forecaster. What’s more, you can get this issue absolutely free. Click here to learn how.