When people look for a dividend pick in the financial sector, Bank of Montreal (TSX:BMO)(NYSE:BMO) is rarely the first name they go to, but the company warrants a closer look, especially given the risks facing the broader Canadian market.

Let’s take a look at Canada’s oldest bank to see if it deserves to be in your portfolio.

Diverse earnings

Bank of Montreal earned a cool $1 billion in the first quarter. This is a great number, but it came in a bit light compared with the same period in 2014. Adjusted earnings per share were down about 4% and the bank’s return on equity (ROE) for the period fell to 12.3% compared with the previous year’s ROE of 14.5%.

These numbers would suggest the bank is indeed facing a more difficult environment than last year, but investors should look at the whole picture when deciding if they should buy the stock.

Bank of Montreal relies on Canadian personal and commercial banking for about half of its total earnings. Adjusted net income increased 4% compared with Q1 last year and came in at $503 million.

The company is benefiting from the rebound in the American economy, especially on the commercial side of the business. In Q1 the U.S. operations enjoyed year-over-year loan growth of 10%, and adjusted net income from the division hit $205 million. That was a 14% increase over the same period in 2014.

In the past few years the bank has invested significantly in building its wealth management business. Excluding contributions from acquisitions, assets under management (AUM) jumped 18% in Q1, primarily driven by a strong U.S. dollar, market appreciation, and the addition of new client assets. Adjusted net income from wealth management hit $186 million.

The weak link in the Q1 report was the BMO Capital Markets group. The division delivered net income of $221 million, a 55% drop compared with the same period in 2014.


Right now, bank investors are focused on sky-high housing prices and the fallout of the troubles in the energy patch.

Canadian residential mortgages represented less than 30% of Bank of Montreal’s total outstanding loans at the end of the first quarter. Of the $93 million in total mortgage loans, $15 million was connected to Alberta.

Compared with its peers, Bank of Montreal’s exposure to a downturn in the housing market is reasonably low. This is especially true when you consider the fact that 62% of the portfolio is insured.

Should you buy?

Bank of Montreal has its earnings exposure spread out nicely among the four segments. A nasty downturn in Canada would certainly have an impact on results, but the company is more than capable of weathering the storm.

The shares currently trade at a reasonable 11 times forward earnings and 1.4 times book value. With a solid $3.20 per share dividend that yields 4%, BMO is attractive in this market and investors should be comfortable buying the stock and sitting on it until they retire.

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Fool contributor Andrew Walker has no position in any stocks mentioned.