Will the Earnings-Induced Rally in Bank of Montreal Continue?

Bank of Montreal (TSX:BMO)(NYSE:BMO) beat third-quarter earnings estimates on August 25, and its stock has reacted by rising over 5%. Will the rally continue?

| More on:
The Motley Fool

Bank of Montreal (TSX:BMO)(NYSE:BMO), the fourth-largest bank in Canada in terms of total assets, announced third-quarter earnings results before the market opened on August 25, and its stock has responded by rising over 5% in the trading sessions since. Let’s take a closer look at the results to determine if this could be the start of a sustained rally higher and if we should consider initiating positions today.

A growing asset base leads to better-than-expected results

Here’s a summary of Bank of Montreal’s third-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago.

Metric Reported Expected Year-Ago
Adjusted Earnings Per Share $1.86 $1.73 $1.73
Total Revenue $4.83 billion $4.70 billion $4.74 billion

Source: Financial Times 

Bank of Montreal’s adjusted earnings per share increased 7.5% and its total revenue increased 1.9% compared with the third quarter of fiscal 2014. The company’s strong earnings-per-share growth can be attributed to its adjusted net income increasing 5.9% to $1.23 billion, driven by 35.1% growth to $235 million in its U.S. personal and commercial Banking segment and 10.4% growth to $233 million in its wealth management segment.

Its slight increase in revenue can be attributed to its net interest income increasing 7.8% to $2.27 billion, driven by growth in the same two segments, including 16.3% growth to $164 million in its wealth management segment and 14.9% growth to $719 million in its U.S. personal and commercial banking segment.

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Revenue, net of insurance claims, commissions, and changes in policy benefit liabilities, increased 9.3% to $4.61 billion
  2. Non-interest income decreased 2.8% to $2.55 billion
  3. Income before income taxes increased 10.8% to $1.53 billion
  4. Total assets increased 14.6% to $672.44 billion
  5. Total deposits increased 12.1% to $447.62 billion
  6. Total loans and acceptances increased 11.4% to $329.18 billion
  7. Total shareholders’ equity increased 15% to $38.2 billion
  8. Total assets under management and administration increased 13.2% to $879.05 billion
  9. Adjusted efficiency ratio improved 330 basis points to 60.5%
  10. Book value per share increased 18.6% to $55.36

Bank of Montreal also announced that it will be maintaining its dividend of $0.82 per share in the fourth quarter, and it will be paid out on November 26 to shareholders of record at the close of business on November 2.

Should you buy or avoid Bank of Montreal today?

It was a great quarter overall for Bank of Montreal, so I think its stock has responded correctly by rising over 5%. I also think this could be the start of a sustained rally higher, because the stock still trades at inexpensive valuations and because it has a very high dividend yield with a track record of increasing its payment, which will continue to attract investors.

First, Bank of Montreal’s stock trades at just 10.4 times fiscal 2015’s estimated earnings per share of $6.71 and only 9.9 times fiscal 2016’s estimated earnings per share of $7.02, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 11.6 and the industry average multiple of 11.9. It also trades at a mere 1.26 times it book value per share of $55.36, which is very inexpensive compared with its market-to-book value of 1.74 at the conclusion of the year-ago period.

Second, Bank of Montreal pays an annual dividend of $3.28 per share, which gives its stock a 4.7% yield at today’s levels. The company has also increased its dividend for four consecutive years, and its increased amount of free cash flow could allow this streak to continue for the next several years.

With all of the information above in mind, I think Bank of Montreal represents one of the best long-term investment opportunities in the financial sector today. All Foolish investors should take a closer look and strongly consider making it a core holding.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

More on Bank Stocks

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

analyze data
Bank Stocks

The Average Canadian Stock Investor Owns This 1 Stock: Do You?

This Canadian stock has about 49% ownership by the public, and with growth and dividends to consider, it's a top…

Read more »

falling red arrow and lifting
Stocks for Beginners

1 Dividend Stock Down 18% to Buy Right Now

CIBC (TSX:CM) is a strong dividend stock investors should certainly consider not just for passive income, but future growth as…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Tech Stocks

Forget TD Stock: 2 Tech Stocks to Buy Instead

TD remains a solid income stock but two outperforming tech stocks are better buys for their strong growth and upside…

Read more »

Question marks in a pile
Bank Stocks

Where Will Royal Bank of Canada Stock Be in 5 Years?

Royal Bank's continued focus on a strong capital position plus its acquisition of HSBC will likely ensure prosperous times ahead.

Read more »

Payday ringed on a calendar
Bank Stocks

How to Build a Bulletproof Monthly Passive-Income Portfolio With Just $10,000 and TD Stock

TD (TSX:TD) stock has been a poor performer over the last few years, but could be a big passive-income winner…

Read more »

Man considering whether to sell or buy
Bank Stocks

Is RBC Stock a Buy, Sell, or Hold?

Shares of Royal Bank of Canada have delivered game-changing returns to shareholders in the last two decades. Is RBC stock…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

Is Scotiabank (BNS) Stock a Buy, Sell, or Hold?

Let's dive into whether the Bank of Nova Scotia (TSX:BNS) remains a solid buy or if it's more of a…

Read more »