In our search for great investments, often the so-called “boring” names get forgotten.
Take, for instance, a U.S.-based REIT I’ve been researching, American Realty Capital Properties Inc. (NASDAQ: ARCP). The company has grown by leaps and bounds over the last few years, going from $138 million in assets after 2011 to more than $21 billion today. The company, which primarily rents out retail space, has a stated goal to become the largest retail REIT in the United States. Even considering its explosive growth, I’d still say that’s a pretty ambitious goal.
Over the last week, serious clouds have began to emerge. ARCP’s management announced that the company had overstated its results during the first two quarters of 2014. Even though the amounts in question were pretty small (just $0.04 per share in funds from operations), what really spooked the market is that the CFO and one other employee admitted to doing it on purpose. As a result, shares are down nearly 40% over the last four trading sessions.
I’m not arguing that every explosive growth story will turn out to be cooking the books, but the fact is that those types of issues tend to happen more with relatively new companies than they do with older companies. Sure, the sexy growth story might be more fun to talk about at a dinner party, but slow and steady blue chips will avoid the majority of those types of problems.
When it comes to blue chips in Canada, Bank of Montreal (TSX: BMO)(NYSE: BMO) just might be the most consistent company you could ever own. Let’s take a closer look.
A history of rewarding shareholders
Bank of Montreal is Canada’s oldest bank, as well as being one of Canada’s oldest companies in general. It was first incorporated in 1817, and started paying dividends in 1829. In its 185 year history of dividends, it hasn’t missed a single one. How’s that for consistency?
Think about everything that’s happened since 1829. We’ve had dozens of recessions and even a Great Depression. Two world wars have been fought. The 1940s and ’50s brought ultra-low interest rates, while the 1980s saw them spike. And through it all, BMO expanded, kept lending and taking deposits, and most importantly, rewarded shareholders consistently.
And the best part? The company is still only the fourth largest bank in Canada and the 10th largest in North America. It’s not some behemoth with no growth possibilities. There are hundreds of opportunities for the bank to get bigger. It could acquire a smaller Canadian competitor, or look into expanding its operations in the U.S. It could even look beyond North American borders.
Plus, it’s relatively cheap
The thing about investing in a old, consistent company like Bank of Montreal is that you’re never going to get explosive growth. If the last 20 years are any indication, you’re looking at a return of 10-12% annually. But really, what’s wrong with that?
Currently, the company trades at just 12.7 times earnings, putting it not only in the cheaper part of the market, but even cheaper than most of its competitors. Earnings are expected to grow 6-7% in 2015.
Essentially, an investment in BMO works out something like this. You’re getting approximately an 8% return just from the company’s earnings. Add in another 6% annually in earnings growth, and in just 10 years you’re looking at a earnings yield of more than 14% on the original investment. Based on today’s dividend yield of 3.8%, you’ll be getting back a significant percentage of those earnings back in the form of dividends. That’s not such a bad deal.
BMO is one of those stocks you can buy and tuck away forever. The consistency it offers can only be matched by a select few other Canadian blue chips. It’s that simple.
