Bank of Montreal (TSE:BMO) Dividend & Stock Analysis

WRITTEN BY Dan Kent | UPDATED ON: October 14, 2020

BMO dividend

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Bank Of Montreal Dividend


Many investors looking to identify strong Canadian dividend stocks head to Canadian financials.

However, COVID-19 has brought about economic conditions we simply have never witnessed before, and as a result investors are fearful of financials.

Do they really need to be? Especially with a stock like The Bank of Montreal (TSE:BMO), a Canadian Big 5 Bank that has paid uninterrupted dividends for more than 190 years, the longest streak in the country.

There is certainly reasons to be weary, and also reasons to buy this Canadian stock right now. Without further ado, let’s dive in to this popular Canadian bank, starting with its dividend.

Bank of Montreal (TSE:BMO) company information

The Bank of Montreal is a diversified financial-services provider with four primary segments: Capital Markets, Wealth Management, P&C Banking, and Canadian P&C Banking.

The bulk of the banks revenue comes from Canada, although it does have operations in the United States. In fact, the company is one of the top 10 commercial lenders in North America, and is the #1 bank in Wisconsin.

In terms of loans here in Canada, the company ranks #2 as of March 2020 according to the Canadian Bankers Association. The bank also has strong exposure in large U.S. states like Arizona and Florida, and is continuing to expand into California. In fact, the company has grown its U.S. loan balance from $12.7 billion in 2010 to $70.4 billion in 2019.

Bank of Montreal dividend analysis

As mentioned above, the Bank of Montreal has one of the most storied dividend histories in the country, paying dividends for 190 consecutive years.

Now, don’t get this mixed up with consecutive years of growth. The 190 years is simply years the company has paid out a dividend.

The company currently has an 8 year dividend growth streak, starting dividend growth back up again after its recovery from the 2008 financial crisis. Along with this streak, the Canadian bank is yielding 5.18% and has grown its dividend at a rate of 5.70% annually over the last 5 years, with its most recent increase topping this growth rate at 7.40%.

Now, it’s no secret that the Bank of Montreal’s dividend growth streak, along with all other major financial institutions, will come to a halt in 2020. The Federal Government has suggested financial institutions forgo dividend growth this year due to the pandemic, and it’s likely all will oblige.

We should still be taking a glass half full approach to this situation due to the fact the company will likely maintain its dividend throughout this pandemic, much like it did in the 2008 financial crisis. This is a tough time for financial companies, but with the Canadian banking sector being one of the most regulated industries in the world, these banks are well capitalized and will continue to reward shareholders with dividend payments. Canadian telecoms can also be an area of interest when it comes to companies that generally have a good hold on their industries. Particularly the Telus dividend, could be on the radar for income investors

TSE:BMO Dividend Yield

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With a yield in the 5.21% range at the time of writing, the Bank of Montreal hasn’t offered this high of a dividend yield since a brief period in 2015. In fact, those who were gutsy enough to purchase this stock at the peak of the COVID-19 crash locked in a 7.50% yield on their money.

The real question is, how safe is this dividend? A 5%+ dividend yield is nice and all, but if the dividend gets cut investors will be in a terrible position.

The good news? I don’t think BMO’s dividend is going anywhere.

TSE:BMO Payout Ratio

As we can see, the Bank of Montreal’s payout ratio is sitting in the high 50% range. This is still historically higher than it’s been over the last half decade, but considering the circumstances, many investors are glad to have its payout ratio sit in this range.

If you’ve read any of my other articles, I do like to discuss the company’s dividend payout ratios in terms of free and operating cash flows. But with a bank this simply doesn’t apply, due to the company running with negative operating cash flows.

So, with banks and other financial institutions here in Canada, I believe earnings is the way to go.

We can see the company’s payout ratio spike during the crash, but this was largely due to high provisions for credit losses, which is money the company sets aside for loans it expects to go unpaid. These provisions ultimately come out of the company’s profits, which is why you see the payout ratio spike.

Now that the banks reported better than expected earnings and less PCL’s, payout ratios should return to normalcy.

Overall, I wouldn’t be concerned with the Bank of Montreal’s dividend at all. Dividend cuts are never impossible, but a cut from this major Canadian bank would be mind blowing to me.

The Bank of Montreal valuation and overall performance

Sure, the dividend is safe now. However, the bank will need to continue to perform moving forward for it to continue to be safe. Also, how expensive is the Bank of Montreal when compared to other Canadian banks?

In terms of valuation, The Bank of Montreal is one of the cheapest banks you can buy in the country today. On a forward price to earnings basis, the only bank stock that is cheaper than BMO is The Bank of Nova Scotia (TSE:BNS).

TSE:BMO price to earnings vs other banks

Market Cap: $52.86 billion
Forward P/E: 11.49
Yield: 5.18%
Dividend Growth Streak: 8 years
Payout Ratio (Earnings): 54.85%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 7.40%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

Right now in terms of forward P/E, the company is offering only a 2% discount to its historical averages over the last 5 years. So, the Bank of Montreal isn’t trading at a discount by any means. And considering the stock is still down nearly 20% year to date, this means earnings are expected to fall in 2021.

So why has the bank struggled so much in 2020 compared to say CIBC or Royal Bank? Well, I believe it’s because the bank has the highest exposure the oil and gas sector out of all the major banks.

Do I feel this high exposure will hurt the company and put investor’s capital in danger? Not at all. In fact, I think it’s way overblown. The Bank of Montreal’s total lending percentage to oil and gas companies is just shy of 3% of its total loan portfolio.

The company has also lagged in recovery compared to a few other banks primarily due to a lacklustre third quarter. While Royal Bank was reporting flat earnings, BMO reported a 22% drop in earnings per share. Both companies saw a boost in revenue however, with BMO’s increasing by 4%. The company’s return on equity also saw a significant hit, down from its usual 13-14% to sit at 9.4%.

Overall, do I view the Bank of Montreal as one of the best plays in terms of major banks? No. I’d probably give that designation to the Royal Bank of Canada. However, contrarian investors who are willing to be patient can scoop this company up, grab a 5%+ dividend yield and wait for it to recover in terms of share price.

Canadian banks are rarely not considered a buy in my eyes, and my opinion on this hasn’t wavered even in light of the worst economic downturn we’ve witnessed in 100 years. If you’re looking to buy stocks in Canada that will shore up your portfolio for many years, BMO is a strong option.