Bank of Montreal (TSX:BMO)(NYSE:BMO) is Canada’s fourth-largest bank and is often brushed aside when investors are considering a new position in the sector.
Here are some reasons why the company probably deserves more respect.
1. Diversified income
The bank gets its income from a variety of segments, and that balance is proving to be a strong asset in the current environment.
Bank of Montreal’s Canadian personal and commercial banking segment is performing well despite the headwinds facing the sector. Fiscal Q4 2015 net income from the group hit $561 million, up 7% compared with the same period in 2014.
On the wealth management side, business has grown in recent years through strategic acquisitions made outside of Canada. Those moves are bearing fruit as year-over-year Q4 2015 adjusted net income rose 8% to $271 million and assets under management increased by 9%.
Bank of Montreal also relies heavily on capital markets activities to generate profits. This segment tends to be more volatile, but it is very profitable when times are good. The group delivered fiscal Q4 2015 net income of $243 million, a 27% increase compared with the previous year.
The big attraction right now is Bank of Montreal’s U.S.-based business. Adjusted net income from the group jumped 22% in the fourth quarter to $221 million. The U.S.-dollar increase was 3%, which highlights the benefit the strong greenback is having on Bank of Montreal’s earnings.
Bank of Montreal recently acquired GE Capital’s Transportation Finance business. The addition of that asset combined with rising interest rates should bode well for the U.S. group in 2016 and beyond.
2. Manageable risks in Canada
Bank of Montreal finished fiscal 2015 with $97 billion in Canadian residential mortgages. Uninsured loans represent 43% of the portfolio and the loan-to-value ratio on that component is 57%. This means the housing market would really have to fall out of bed before Bank of Montreal sees a material impact.
Regarding energy risks, the bank’s exposure to oil and gas companies only accounts for 2% of the total loan book, so that shouldn’t be much of a concern for investors.
3. Dividend stability
Bank of Montreal recently raised its quarterly dividend to $0.84 per share. The distribution yields a safe 4.5%, and investors should see the latest increase as an indication of management’s confidence in earnings growth going forward.
The bank has given shareholders a piece of the profits every year since 1829, so there is good reason to believe the trend will continue.
4. Fair valuation
Bank of Montreal currently trades at 11 times trailing earnings, which is pretty much in line with the five-year average. Investors might get a chance to pick the stock up at a better price in the coming months, but the bank looks like a reasonable pick right now, and you can start collecting the dividend right away.
