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Why Bank of Montreal Is Down Over 2%

Bank of Montreal (TSX:BMO)(NYSE:BMO), Canada’s fourth-largest bank, announced its third-quarter earnings results this morning, and its stock has responded by falling over 2% in early trading. Let’s break down the quarterly results and the fundamentals of its stock to determine if we should use this weakness as a long-term buying opportunity or a warning sign to avoid it for the time being.

The Q3 performance

Here’s a quick breakdown of 10 of the most notable financial statistics from BMO’s three-month period ended on July 31, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Net interest income $2,533 million $2,474 million 2.4%
Non-interest income $2,926 million $3,159 million  (7.4%)
Total revenue $5,459 million $5,633 million (3.1%)
Total revenue, net of claims, commissions, and changes in policy benefit liabilities (CCPB) $5,206 million $4,942 million 5.3%
Adjusted net income $1,374 million $1,295 million 6.1%
Adjusted earnings per share (EPS) $2.03 $1.94 4.6%
Total assets $708.62 billion $691.68 billion 2.4%
Deposits $473.11 billion $467.85 billion 1.1%
Net loans and acceptances $375.97 billion $364.13 billion 3.3%
Book value per common share $59.65 $58.06 2.7%

Should you buy BMO on the dip?  

The third quarter was decent at best for BMO, but it posted a very strong performance in the first nine months of 2017, with its revenue up 5% to $16.61 billion, its adjusted net income up 15.8% to $4.2 billion, and its adjusted EPS up 14.8% to $6.22. With these two things being said, I think the weakness in its stock is warranted, but I also think it represents a great buying opportunity for long-term investors for two fundamental reasons.

First, it’s undervalued. BMO’s stock now trades at just 11.3 times fiscal 2017’s estimated adjusted EPS of $7.97 and only 10.7 times fiscal 2018’s estimated adjusted EPS of $8.39, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 11.8. These multiples are also inexpensive given its current earnings-growth rate and its estimated 5.5% long-term earnings-growth rate.

Second, it has a great dividend. BMO pays a quarterly dividend of $0.90 per share, equal to $3.60 per share annually, which gives it a lavish 4% yield. It’s also important to note that its recent dividend hikes, including its 2.3% hike in May, have it on track for 2017 to mark the sixth consecutive year in which it has raised its annual dividend payment, and it has a target dividend-payout range of 40-50% of its adjusted EPS, so I think its very strong growth will allow this streak to easily continue into the late 2020s.

With all of the information provided above in mind, I think all Foolish investors should strongly consider using the post-earnings weakness in BMO’s stock to initiate long-term positions.

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Fool contributor has no position in any of the stocks mentioned.

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