Bank of Montreal (BMO) says its dividend is safe for now, but the Street isn't 100% sure that investors can count on the current payout down the road.
Following Bank of Montreal's fourth quarter results, RBC Capital Markets analyst Andre-Phillipe Hardy wrote in a note to clients:
BMO has a higher dividend payout ratio than peers and, if the economic slowdown proves deeper and longer than we expect, BMO has less flexibility, in our view, to maintain its dividend.
In addition to reporting a 24% year-over-year increase in profit during the quarter, the bank reaffirmed to shareholders its C$0.70 quarterly dividend, but also said it is unlikely they will see a dividend increase any time soon.
Mr. Hardy noted that Bank of Montreal's capital ratios are high, and it may need to strengthen capital. If it does, the analyst said he believes the bank would prefer to continue raising non-common equity as opposed to cutting the dividend or raising common equity.
The bank's high dividend payout target of 45% to 55% means that its dividend burden would be higher than other banks if it issued more common shares. For BMO to cut dividends, we believe that its earnings power would have to be threatened and/or equity capital would be needed to a degree that the increase in shares outstanding would make the quarterly dividend payment too large to support from income.
John Aiken, analyst at Dundee Capital Markets, echoed some of these thoughts, also telling clients in a note that he doesn't anticipate a dividend cut in the coming quarters. That is unless "the domestic economy deteriorates to a significantly greater degree than we forecast."
The Dundee analyst said Bank of Montreal's capital remains strong. While the bank will not likely need to raise additional common equity, he added that a dividend increase is out of the question for now, given the earnings headwinds facing the company.