Bank of Montreal (BMO)
By Chloe Lutts Jensen, Chief Analyst, Cabot Dividend Investor
From Cabot Wealth Advisory 8/5/14 Sign up for Cabot Wealth Advisory—it's free!
Today, my screens led me, once again, to a Canadian bank. (My first pick in this series, back in April, was Toronto Dominion Bank, TD up 11% to date.)
Bank of Montreal (BMO) is TD's smaller sibling, currently the fourth-largest bank in Canada. Here's a one-year chart of BMO's price:
BMO pays quarterly dividends that currently yield 3.9%. The company has increased the dividend twice in the past year, resuming a trend of strong dividend growth. (After raising the dividend every year from 1995 to 2008, BMO suspended dividend increases for a few years in response to the financial crisis. However the dividend was never cut.)
IRIS gives BMO a Dividend Safety Rating of 9.1 and a Dividend Growth Rating of 5.9, although I expect the latter to improve steadily as BMO keeps the dividend increases coming.
Operating income has steadily increased every year since 2008, and the company has kept the payout ratio below 50% for the past two years.
If the market's current pullback turns out to be a regular correction and not the start of a new bear market, it could present dividend investors with a good opportunity to establish a position in this high-quality Canadian bank at advantageous prices.
From Cabot Wealth Advisory 11/26/12 Sign up for free Cabot Wealth Advisory e-newsletter
The stock I want to highlight today is Bank of Montreal (BMO). It's Canada's oldest bank, and one of the Big Five banks in Canada. Its stock is traded on the NYSE, and it yields 4.9%.
Here's what Roy Ward, editor of Cabot Benjamin Graham Value Letter, wrote about it recently.
"Founded in 1817 in Montreal, Bank of Montreal provides a wide range of retail banking, wealth management and investment banking services in North America. The bank also provides an array of credit and non-credit products and services. The bank maintains 1,600 branches in Canada and the U.S., and operates internationally in major financial markets and trading areas throughout most of the world. Bank of Montreal has made three major acquisitions during the past three years.
"Marshall & Ilsley (M&I) of Wisconsin was purchased in July 2011 for $4.2 billion. BMO paid a very reasonable price, but M&I's loan portfolio includes some non-performing loans. Bank of Montreal folded M&I Bank into its Harris Bank division (based in Chicago). In 2009, Bank of Montreal acquired Diners Club North America from Citigroup for $1.0 billion cash. In 2009, it acquired AIG's Canadian Life and Health Insurance unit for $375 million in cash.
"Revenues climbed 12% and earnings per share (EPS) increased 13% during the 12 months ended 9/30/12. I expect revenues to advance 2% and earnings to increase 6% during the next 12-month period, although Marshall & Ilsley's better-than-expected performance could boost revenues and earnings noticeably higher. Remarkably, BMO has been paying dividends since 1829. The dividend was recently raised for the first time in five years and now provides a high 4.9% yield. At 9.5 times my forward 12-month EPS forecast of 6.29, Bank of Montreal shares are undervalued. BMO is governed by the strict Canadian banking regulations and is low risk."
It makes perfect sense to me, and I hope it does to you, too. Furthermore, I hope it helps you understand that equities truly are the uncrowded trade today, with unadvertised bargains galore.
How else can you explain the fact that government bonds are so popular, even though rates are in the basement and rising rates would be devastating to investors' principle, while high-quality stocks like Bank of Montreal--whose dividends are much more secure--are available for bargain prices?
Now, you could agree with all this and simply buy some BMO, but what I recommend is a no-risk trial subscription to Cabot Benjamin Graham Value Letter, so that you can get regular follow-ups on BMO, as well as advice on investing in similar undervalued stocks.
Over the past 10 years, the Letter's Classic Model has achieved a total return, not including dividends, of 185.6% compared to a return of just 47.3% for the Dow Jones Industrial Average. And I think even better performance is on the way. For details, click here.
|Bank of Montreal (BMO)
129 rue Saint Jacques
Montreal, QC H2Y 1L6 Canada
|Index Membership: N/A
Industry: Money Center Banks
Full Time Employees: 46,594
11/26/12 Bank of Montreal (BMO): An unadvertised bargain