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Is Bank of Montreal a Top Income Pick?

Bank of Montreal (TSX:BMO)(NYSE:BMO) lies in the shadows of its larger peers, but the company might step into the spotlight in the coming years.

Earnings strength

Bank of Montreal delivered solid fiscal Q3 earnings with a 6% rise in adjusted net income compared with the same period for 2014. Total profits in the quarter hit $1.23 billion. The company remains successful in a tough market because it earns revenue from a broad range of business segments.

The Canadian personal and commercial banking division delivered Q3 net income of $557 million, up 6% year over year. Deposits increased by 6% and loans grew by 3%.

Bank of Montreal also has strong operations south of the border with more than 600 branches serving clients in the U.S. Midwest. The U.S. group had an impressive Q3 with adjusted net income of $186 million, up a solid 36% compared with the same period in 2014. Much of the growth is attributed to the commercial franchise. The segment recorded double-digit loan growth in the latest quarter, and investors should see continued strength from the U.S. operations.

Bank of Montreal recently agreed to purchase GE Capital’s commercial truck financing business, which will help grow the company’s commercial customer base. The unit has 11 U.S.-based locations and four in Canada.

The bank’s wealth management division is also growing as the company expands into international markets. Assets under management increased by 13% in the third quarter and net income from the segment rose 8% to $233 million.

The capital markets group saw earnings fall 11% to $274 million in Q3 when compared with a particularly strong third quarter in 2014. This part of the business tends to be more volatile than the others, and earnings often vary significantly between quarters.

Risk profile

Bank of Montreal has about $95 billion in Canadian residential mortgages on its books. Only 40% of the portfolio is uninsured and the loan-to-value ratio on those loans is a reasonable 58%.

This means the Canadian housing market would have to crash pretty hard in a short period of time before the bank would see significant losses.

The bank has a CET1 ratio of 10.4%, which means the capital position is very strong.

Dividend reliability

Bank of Montreal pays a quarterly dividend of $0.82 per share that yields 4.4%. The company has paid a distribution every year since 1829, and there is no reason to believe the winning streak will end.

Should you buy?

The bank has a diversified revenue stream that will help it ride out the current rough patch in the Canadian economy. At 10.5 times forward earnings the stock looks pretty attractive. If you have some cash sitting on the sidelines, Bank of Montreal should be a solid long-term pick.

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

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to find out how you can claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

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