Bank Of Montreal: Rock Solid For 200 Years And Counting

| About: Bank of (BMO)

Summary

Bank of Montreal is the fourth largest of the Canadian Banks and makes a great core position in any portfolio.

Founded 200 years ago and the first Canadian corporation to ever issue dividends in 1829, the bank still continues to grow.

BMO continues to grow its international footprint diversifying from the Canadian market and growing strongly.

Bank of Montreal (NYSE:BMO) can be a solid foundation stock in any portfolio -- providing both income and growth. BMO is the fourth largest of the Canadian banks by market cap. The company provides a diversified array of financial services operating via four segments: Canadian P&C, US P&C, BMO Wealth Management, and BMO Capital Markets. BMO is one of the oldest corporations in Canadian history, founded in 1817 and is headquartered in Montreal, Canada.

Note: All mentions to the stock in this article refer to the TSX-listed security and in Canadian dollars (CAD$) (native currency) unless otherwise noted.

A Closer Look

The company's peers include Royal Bank of Canada (NYSE:RY), Toronto-Dominion Bank (NYSE:TD), Bank of Nova Scotia (NYSE:BNS), and Canadian Imperial Bank of Commerce (NYSE:CM).

The Canadian banks are regarded as some of the safest financial institutions in the world. The companies have a long track record of being conservative and focused on long-term stability and prosperity. Most of these institutions have existed and paid dividends for more than 150 years and make for great core positions in any investor's portfolio.

Bank of Montreal takes pride in being the first and longest dividend-paying corporation in Canadian history. The company was founded in 1817 and recently celebrated the 200th anniversary. BMO is also the first Canadian corporation to ever issue dividends in 1829, an unbroken chain ever since. It is also impressive to note that the company has only reduced its dividends once in 1942. More recently, the company has been expanding overseas and has a sizeable footprint in the US, Europe and Asian markets.

(Image Source: Bank of Montreal's Investor Presentation)

A snapshot of BMO's recent (as of Q1 2017) performance and sector breakdown is presented below:

(Image Source: Bank of Montreal's Q1 2017 Corporate Fact Sheet)

The following chart has been constructed by perusing the segmented information in each year's annual report at BMO. This provides us a window into the management's strategy for overall growth. As can be seen, BMO continues to expand and generate more revenue in the US, and is now close to the 1/3 mark.

(Image Source: Created by author. Data from BMO's annual reports for each year)

Dividend Stock Analysis

Financials

Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations.

(Source: Created by author. Data from Morningstar)

Actual: Bank of Montreal continues to grow both its top line and bottom line numbers steadily over the years. As with any financial institution, BMO suffered during the global financial crisis, as earnings shrunk, but those numbers have recovered very nicely since.

BMO's yield of maturity is as shown below. A lot of debt repayments are upcoming this year.

(Image Source: Morningstar)

It is interesting to note that both DBRS and Moody's have a negative outlook on BMO, although they all have good ratings for the senior debt.

(Image Source: Bank of Montreal's website)

Dividends and Payout Ratios

Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/manageable payout ratio to indicate that the dividends can be raised comfortably in the future.

(Source: Created by author. Data from Morningstar)

Actual: BMO is a legendary institution when it comes to dividends - being the first company to ever issue dividends in Canadian corporate history in 1829. The company has paid dividends every single quarter since and has only cut dividends once in 1942.

During the financial crisis of 2008/2009, the company froze its dividends. However, the dividend growth has continued again since 2012. The 1-, 3-, 5-, and 10-yr dividend CAGR (Compound Annual Growth Rates) are 4.9%, 5.0%, 4.0%, and 4.2%, respectively.

Outstanding Shares

Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble.

(Source: Created by author. Data from Morningstar)

Actual: The number of shares increased between 2008 and 2012 but has stabilized since. Last month, BMO announced that it will repurchase 15M shares (approx. 2.3% of public float) between May 1, 2017, and Apr 30, 2018.

Book Value and Book Value Growth

Expected: Growing book value per share.

(Source: Created by author. Data from Morningstar)

Actual: The book value has increased steadily over the years.

Valuation

To determine the valuation, I use the Graham Number, average yield, average price-to-earnings, average price-to-sales, and discounted cash flow. For details on the methodology, click here.

The Graham Number for BMO with a book value per share of $44.05 and TTM EPS of $7.56 is $86.56.

BMO's average yield over the past five years was 3.8% and past ten years was 4.55%. Based on the current annual payout of $3.52, that gives us a fair value of $92.63 and $77.36 over the 5- and 10-year period, respectively.

BMO's 5-year average P/E is 11.98, and the 10-year average P/E is 12.26. Based on the analyst earnings estimate of $8.42, we get a fair value of $100.87 (based on 5-year average) and $103.23 (based on 10-year average).

The average 5-year P/S is 2.82 and average 10-year P/S is 2.65. Revenue estimates for next year stand at $34.59 per share, giving a fair value of $97.54 and $91.66 based on 5- and 10-year averages, respectively.

The consensus from analysts is that earnings will rise at 7.48% per year over the next five years. If we round that down to 7% and run the three-stage DCF analysis with a 10% discount rate (expected rate of return), we get a fair price of $129.86.

Images below come from Simply Wall St, a financial visualization tool that has an ingenius way of representing value, future performance, past performance, financial health and dividends -- all in one single image called Snowflake. I recently posted a review of Simply Wall St where I explain the features. If you are unfamiliar with the tool, be sure to check out the review. However, the images used below are fairly intuitive to understand.

(Source: Simply Wall St)

(Source: Simply Wall St)

Simply Wall St. rates Bank of Montreal a "Flawless balance sheet 6 star dividend payer," although also notes that the current share price is deep in the overvalued territory.

Conclusion

BMO is a solid foundation stock for any portfolio looking for growth and income. The company is well-diversified, across both segments and geographies. BMO boasts the longest track record when it comes to dividend payments in Canadian corporate history. The company has been growing overseas and expanding its footprint via both P&C segment and the capital markets segment. The current share price appears fairly valued. If we give equal weight to all valuation metrics used in this article, the fair value for BMO is $100.56.

Futher Reading: Be sure to check out the dividend stock analysis of the other Canadian banks as part of this series:

Full Disclosure: Long BMO, TD. My full list of holdings is available here.

Disclosure: I am/we are long BMO, TD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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