Beat the Market With This Big Bank Stock

Get a juicy yield and market-beating returns with below-average risk from Bank of Montreal (TSX:BMO)(NYSE:BMO) now!

| More on:
hand using ATM

Image source: Getty Images

Bank of Montreal (TSX:BMO)(NYSE:BMO) reported its fiscal second-quarter results in the past week. The stock has dipped about 3.6% since then.

The bank stock is an excellent buy today, as it offers a safe 4.1% yield, trades at a discounted valuation, and offers market-beating total returns potential.

BMO’s Q2 results

For fiscal Q2 that ended April 30, BMO reported net revenue growth of 8% to $5.6 billion, adjusted net income growth of 4% to $1.5 billion, and adjusted earnings per share (EPS) of $2.30, up 5% over the same quarter in the prior year. The bank’s capital position remains pretty strong with a common equity tier 1 ratio of 11.3%.

BMO’s year-to-date results

Looking at results over a longer period gives a clearer bigger picture. In the first half of the fiscal year, BMO reported net revenue growth of 7% to $11.2 billion, adjusted net income growth of 6% to $3 billion, and adjusted EPS of $4.62, up 7%, against the same period a year ago.

Adjusted ROE was 13.9%, down from 14.4% a year ago. That’s not too alarming as long as the bank keeps a teens ROE. Provision for credit losses was $313 million, up 4% year over year compared to loan growth of more than 12%, thereby suggesting that BMO has a prudent lending practice.

Safe dividend

BMO has a long history of paying safe dividends. Even during the last financial crisis, it was able to maintain its dividend. Management aims to pay out 40-50% of earnings as dividends. This year, the payout ratio is only estimated to be about 42%, which is at the low end of the range.

Currently, the bank is estimated to grow EPS by about 6% per year over the next three to five years. Combining a low payout ratio with earnings growth, it’s within reason for the bank to deliver dividend growth that will be slightly higher than its actual earnings growth over the period.

The bank just increased its quarterly dividend to $1.03 per share, 7.3% higher than it was a year ago and implying an annual payout of $4.12 per share and a safe yield of 4.1% at the current quotation.

Foolish takeaway

At about $99.30 per share as of writing, BMO stock trades at a blended price-to-earnings ratio (P/E) of about 10.6, while its long-term normal P/E is 11.6.

Buyers today can expect an estimated return of about 10% from the dividend and earnings growth. Should the stock experience a P/E multiple expansion to a normalized level, investors today can experience total returns of about 12% per year over a five-year period. What a fabulous return to get from a safe, blue chip stock!

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 Kay Ng has no position in any of the stocks mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »