Bank of Montreal (TSX:BMO)(NYSE:BMO), the fourth-largest bank in Canada in terms of total assets, has watched its stock widely underperform in the overall market it 2015, falling about 6% compared to the TSX Composite Index’s gain of about 4%, but it has the potential to be one of the market’s top performers over the next three to five years. Here are three primary reasons why this could happen, and why you should consider establishing a long-term position today.
1. A growing asset base is driving revenues higher
On February 24 Bank of Montreal released its first-quarter earnings results, and its stock has responded by rising about 1.9% in the weeks since. Here’s a breakdown of eight of the most notable statistics and updates from the report compared to the year-ago period:
- Adjusted net income decreased 3.9% to $1.04 billion
- Earnings per share decreased 5% to $1.53
- Revenue increased 12.9% to $5.06 billion
- Non-interest income increased 19.9% to $2.84 billion
- Total assets increased 13.4% to $672.36 billion
- Total deposits increased 16.7% to $429.78 billion
- Total net loans and acceptances increased 9.6% to $317.63 billion
- Book value per share increased 16.2% to $52.98
2. The stock trades at inexpensive forward valuations
At today’s levels, Bank of Montreal’s stock trades at just 11.6 times fiscal 2015’s estimated earnings per share of $6.66 and only 10.8 times fiscal 2016’s estimated earnings per share of $7.13, both of which are inexpensive compared to its long-term growth potential.
In addition, the company’s stock trades at a mere 1.46 times its book value per share of $52.98, which is very inexpensive compared to its market-to-book value of 1.70 at the conclusion of fiscal 2014.
I think Bank of Montreal’s stock could consistently command a fair multiple of at least 12, which would place its shares around $80 by the conclusion of fiscal 2015 and upwards of $85.50 by the conclusion of fiscal 2016, representing upside of approximately 3.5% and 10.6%, respectively, from current levels.
3. A generous dividend that is on the rise
Bank of Montreal pays a quarterly dividend of $0.80 per share, or $3.20 per share annually, which gives its stock a lavish 4.1% yield at current levels. Furthermore, the company has increased its dividend five times since 2012, showing that it is highly dedicated to maximizing shareholder value, and its consistent free cash flow generation could allow for another increase in the fiscal 2015.
Should you buy shares of Bank of Montreal today?
Bank of Montreal represents one of the market’s best long-term investment opportunities because it has the support of a consistently growing asset base, because its stock trades at inexpensive forward valuations, and because it has a 4.1% dividend yield. Foolish investors should take a closer look and strongly consider beginning to scale in to long-term positions.
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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.