Bank of Montreal (TSX:BMO)(NYSE:BMO) stock has taken on a brunt of the damage amid the coronavirus crash. The macro headwinds seem insurmountable at this juncture, and as a result, the bargains are the best they’ve been since the Great Recession. Moreover, the dividends, which now have the highest yields since the last crisis, can be relied on through these dark times.
After the latest wave of COVID-19-induced layoffs, Canadians need their dividends more than ever. And despite the bleak outlook, the Canadian banks are not only in a spot to continue paying dividends, but are also in a spot to hike their dividends as most other firms slash theirs.
BMO stock looks like the best bank for your buck
While I’d buy any of the Canadian bank stocks here after enduring amplified damage relative to the TSX Index over the last month, BMO stock stands out as the best bargain for one’s dollar.
The bank known as Big Blue has been punished most severely for its marginally higher loan exposure to the ailing oil and gas (O&G) sectors, which are undoubtedly under pressure following the latest rout in oil prices.
Many investors who were looking to raise cash had no hesitation when it came to selling BMO stock. Oil and gas is toxic, and amid the breakdown of OPEC+, investors don’t even want to be exposed to the banks that provide loans to firms in the ailing Canadian energy sector.
For firms like BMO, soured loans could accelerate going into the latter part of the year now that the stage has been set for a slew of bankruptcies in the ailing Albertan oil patch.
BMO stock is down to the $60s, but probably not for long
As horrific as the energy space is, BMO is not at risk of going under as a result of the one-two punch of COVID-19 and rock-bottom oil prices.
The bank is very well capitalized, and with some of the lowest capital ratios in the Big Six, BMO will not only survive the hurricane that lies ahead, but also likely to lead the upward charge when the immense pressures gradually subside.
Similar to the Financial Crisis, BMO stock will rebound almost as quickly as it crashed. As you may remember, BMO shares crashed hard in 2007-2008 and rallied just as hard when the page was finally turned on the economic cycle.
With the big banks now in CET1 territory, it’s worth remembering that the banks, including BMO, are in much, much better shape from a capital condition standpoint than they were back in 2006-2007.
As such, the banks are still blue-chip dividend growth kings that investors should feel comfortable buying on the way down. While BMO’s low-double-digit ROE numbers may continue to pale in comparison to its peers capable of sporting mid-double-digit ROE numbers, I am a huge fan of BMO’s discount on a relative basis at this juncture.
Foolish takeaway
At the time of writing BMO stock sports a 7.3 times forward P/E. Given that both EPS and cash flow numbers are going to fall under due pressure, though, it makes more sense to value bank stocks based on a price-to-book basis.
Shares currently trade at a mere 0.9 times book, which I believe to be an absolutely ridiculous discount relative to its peers in the space. With a handsome 6.4% yield at the time of writing, investors should look to back up the truck with shares at these depths.
Yes, BMO stock deserves to trade at a discount. But you have to draw a line somewhere.
Stay hungry. Stay Foolish.
