Bank of Montreal: AIG Deal Confirms Dividend's Safety

The news is out about AIG’s (AIG) Canadian Life Insurance business, and despite the rumors on Bloomberg, BMO Financial Group (BMO) wound up as the winning bidder.

I was in a TV studio in mid-December, and one of folks sitting beside me asked me what I thought would “happen” with the BMO dividend. The premise of his question was understandable: with a 9% handle, won’t BMO management have to cut the dividend? Isn’t that what the market is telling us?

I suggested that he separate the actual implied yield from what is most likely to happen. The market might be pounding both the Bank of Montreal and the Bank of Nova Scotia (BNS) for a variety of reasons, but the fact that the dividend at BMO had hit 9% as a result, was an afterthought - if any PMs were thinking about it, at all. If BMO had to cut the dividend, it would be due to future unforeseen financial problems, not the simple fact that the stock was at $30 and the implied yield was 9%.

A short time later, BMO raised $1 billion of equity at $30, which confirmed that 1), the market hadn’t given up hope on the business, and 2), that BMO management must have known that selling stock, only to cut the dividend a few quarters later, would potentially be a potentially career limiting move, and were comfortable with where it stood.

Two more weeks have passed, and BMO is spending $375MM of that $1 billion on an important new business thrust. This is not the act of an institution, which is worried about free cash flow, or its ability to continue to pay the $2.80 dividend (now yielding 8.5%).

That’s why it is in the Decade of Daddy Mirror Fund.

Disclosure : I own BMO.

Comments

[tj987:]

BMO will eventually cut the dividend, it would only be prudent, housing prices in canada have a long way to go down and the economy is in the dumps for a couple of years..

Jan 20 11:43 AM