Shares of one of Canada’s largest financial institutions, Bank of Montreal (TSX:BMO)(NYSE:BMO) fell 2% on December 3, 2019. The company announced its fiscal fourth-quarter 2019 (ended in October) results yesterday and reported sales of $6.09 billion — a year-over-year growth of 3.4%. Its adjusted earnings per share (EPS) rose from $2.32 in the fourth quarter of 2018 to $2.43 in the fourth quarter of 2019.
Analysts estimated BMO to post sales of $5.85 billion with adjusted EPS of $2.41. While the company managed to beat revenue and earnings estimates, the disconcerting news was BMO’s announcement of employee layoffs.
During the company’s conference call, BMO’s management stated that they will cut the employee workforce by 5%. This will result in an elimination of approximately 2,300 positions.
BMO Wealth Management reports a 31% increase in net income
We have seen that BMO’s adjusted net income was up close to 5% year over year in the October quarter. Its Canadian personal and commercial (P&C) segment increased net income by 6%, while the U.S. P&C segment increased net income by 5%.
The main driver for BMO’s bottom line was the BMO Wealth Management segment, which reported an increase of 31% in adjusted net income. This growth was offset by the BMO Capital Markets, which experienced a decline of 9.4% in net income.
BMO’s CEO Darryl While stated, “BMO finished the year with very strong performance, delivering $1.6 billion in adjusted earnings and adjusted earnings per share of $2.43 in the fourth quarter, up 5% year over year, with pre-provision pre-tax earnings growth of 11%, driven by positive operating leverage in all businesses and particularly strong operating performance in Personal and Commercial banking in both Canada and the U.S.”
Key highlights for BMO in Q4
In the October quarter, BMO launched a digital lending solution for its Canadian P&C segment. Using this application, customers will now be able to apply for a personal line of credit within a few minutes.
It also became the first Canadian financial institution to offer retail credit card customers with an option to report a lost or stolen card through the online banking process. These digital solutions may help BMO gain traction among the tech-friendly Canadian populace.
BMO Global Asset Management was named the best manager in liability-driven investment by Financial News for the second consecutive year.
During the earnings call, BMO announced an increase in its dividend payout. It increased quarterly dividend payments by $0.03 to $1.06 per share per quarter. This amounts to annual dividends of $4.24 per share, indicating a forward dividend yield of 4.3%.
What’s next for BMO and investors?
BMO has outlined a few financial objectives. It aims to grow adjusted earnings by an annual rate of 7-10% and earn an average return on equity of at least 15%. BMO wants to generate an average net operating leverage of 2% or more and maintain capital ratios that exceed the regulatory requirements.
Over the last decade, BMO has managed to generate average shareholder returns of 11.6%. the average annual growth for adjusted EPS stands at 9%, while the annual average ROE is 14.4% in the last 10 years.
BMO’s employee layoff remains a concern and will add to the current volatility in equity markets.
BMO stock, however, remains a solid long-term pick given its huge presence in Canada and strong fundamentals.
