Bank of Montreal is executing well with robust operating metrics.
It continues to expand its U.S. presence and has a leading digital strategy.
Meanwhile, it’s well capitalized and continues its storied dividend track record with a big raise this month.
Looking for more investing ideas like this one? Get them exclusively at Hoya Capital Income Builder. Learn More »
JHVEPhoto/iStock Editorial via Getty Images Canadian banks are often regarded as being income favorites for investors who prize stability and growth. This is reflected by their long dividend track records that far surpass that of its big U.S. counterparts.
This brings me to one of the stalwarts, Bank of Montreal ( BMO ), which comes with a storied track record of shareholder returns. In this article, I highlight what makes BMO a solid buy for conservatively minded investors who prize quality and growth, so let’s get started. BMO: A Smart 4% Yielder From Up North
Bank of Montreal is the fourth largest of the Big 5 Canadian banks and is the 8th largest in North America by assets. It serves more than 12M customers, providing personal and commercial banking, wealth management, and investment services.
Notably, BMO has a meaningful presence in the U.S., deriving 36% of its revenues there, with the remaining 58% and 6% stemming from Canada and Other territories.
What sets BMO apart from other banks is its ultra-long dividend streak. It initiated its first dividend in 1829, and hasn’t missed a payment since. This commitment to shareholder returns has been rewarding for BMO investors.
As seen below, BMO has produced a 14% CAGR (including dividends) over the past 26 years, far surpassing the 10% CAGR of the S&P 500 ( SPY ) over the same timeframe. (Source: Dividend Channel)
Recent concerns around COVID, however, have driven down the share price, from the $112-level reached in November to $101.65 at present. As seen below, the recent sell-off has resulted in an RSI score of 32, indicating that BMO is well approaching oversold territory. (Source: StockCharts)
Meanwhile, BMO is hitting on all cylinders with strong operating performance to close out its FY 2021 (ended October 31 st ). This is reflected by fourth quarter adjusted EPS growing by 38% YoY and by a strong return on equity of 16%, an increase from 12.4% in the prior year period. Additionally, BMO overachieved on its financial targets set in 2018. This includes a strong expansion into the U.S., achieving an efficiency ratio of 56.5%, and a 3-year average EPS growth of 18.2%, as seen below. (Source: Investor Presentation )
Looking forward, BMO is well-positioned for continued growth as it continues to build upon its digital-first strategy, which has delivered 100 million personalized insights and alerts to customers since inception. BMO also has a leading position in digital, deriving 1/3 and 1/4 of its Canadian and U.S. sales from digital platforms.
In addition, BMO’s recently announced acquisition of Bank of the West from BNP Paribas ( OTCQX:BNPQY ) further bolsters its U.S. expansion strategy. Importantly, management expects for this transaction to be immediately accretive on closing, with the expectation of 10% bottom-line accretion by 2024. Morningstar believes this makes strategic sense, as it opens the door for BMO’s expansion into the American West, as noted in its recent analyst report: We think the deal makes strategic sense. For BMO, the deal opens up its footprint, plays to its operational strengths, and gives it greater exposure to a good geographic market. In the U.S., BMO had been mostly focused on the Midwest; this deal opens up the rest of the Western U.S., particularly California. BMO has tended to do well with small-business and commercial-related operations in the Midwest with its long-standing BMO Harris franchise, which has been operating in the U.S. since the 1980s. Therefore, we think Bank of the West plays to BMO’s strengths here, as it already has a commercial franchise that could be better optimized with BMO’s backing. Finally, California is viewed as a good market for banks due to its size and growth characteristics, and several banks have made pushes in the state recently. We like the deal and think it will be mildly accretive to BMO shareholders, largely depending on how much growth BMO can generate from the franchise. Meanwhile, BMO is well-capitalized for financial headwinds, with a common equity Tier 1 ratio of 13.7%, an increase from 11.9% last year, and sitting above the 10.25% regulatory requirement.
Importantly, BMO recently upped its dividend by an impressive 25% . Management has a longstanding commitment to […]