Bank of Montreal (TSX:BMO)(NYSE:BMO) is often overlooked in favour of its larger peers, but that could begin to change.
Here are the reasons why I think investors should put Canada’s oldest bank on their radar.
1. Earnings diversity
Bank of Montreal earned adjusted net income of $1.1 billion or $1.71 per share in the second quarter, up from $1.63 per share in the same period last year.
Canadian personal and commercial banking is doing well amid a difficult environment. The division delivered adjusted Q2 net income of $487 million, a slight improvement over Q2 2014. Year-over-year revenue growth was 4% and deposits increased by 7%.
The U.S. operation continues to see strength and is a big reason investors should consider the stock right now. Adjusted net income from U.S. personal and commercial banking hit $176 million, up from $154 million during the second quarter last year. Commercial loan growth continues to be strong in the group, delivering a solid 17% year-over-year gain. The bank has more than 600 branches with two million customers in the Midwestern region of the United States, where it has been building a strong brand since the 1980s.
Bank of Montreal is also building a strong wealth management division. Acquisitions in recent years have targeted opportunities outside of Canada and the company now has an active presence in Canada, the U.S., Europe, and Asia.
Net income in the wealth management operations jumped by 34% in Q2 compared with the same period last year. Assets under management increased by 36% and the company’s insurance business benefited from favourable movements in long-term rates.
The fourth pillar of Bank of Montreal’s operations is its capital markets group. Earnings in this segment tend to be more volatile than the other areas. Year-over-year results were slightly lower for Q2, but the company improved greatly over Q1 2015.
Overall, the company has a very diversified revenue stream. Economic growth in the U.S. is expected to outpace Canada in the near term, which should support earnings coming from the U.S. operations. The strong U.S. dollar is also providing a nice boost to earnings.
2. Dividend growth and share buybacks
Management just increased the quarterly dividend by $0.02 to $0.82 per share. The company has a strong history of raising the dividend and has been giving shareholders a cut of the profits every year since 1829. The dividend currently yields about 4.4%.
Bank of Montreal is also committed to buying back its stock. In the second quarter the company repurchased and cancelled three million shares, bringing the 2015 total to six million.
3. Valuation
The stock currently trades at an attractive 10.6 times forward earnings and just 1.5 times book value.
