Bank of Montreal (TSX: BMO)(NYSE: BMO) is one of the largest banks in Canada that’s valued at a market cap of $83.1 billion. BMO has also been one of the top Canadian blue-chip stocks on the TSX and has returned over 90% in cumulative returns in the last five years after adjusting for dividends.
While past returns don’t matter much to current investors, let’s take a look to see if BMO stock should be part of your portfolio right now.
Strong quarterly results
Bank of Montreal recently disclosed its fiscal third-quarter 2021 results and reported revenue of $7.56 billion and adjusted earnings per share of $3.44. In the year-ago period, its sales stood at $7.19 billion, while EPS was $1.85. Comparatively, Bay Street forecasts adjusted earnings of $2.94 in the quarter ended in July.
BMO ended Q3 with a common equity tier one ratio of 13.4%, which was higher compared to the ratio of 11.6% in the prior-year period.
Company CEO Darryl White was upbeat about BMO’s quarterly performance and explained operating momentum across multiple businesses is driving strong financial performance this year. BMO also recorded a healthy pre-provision tax-earnings of $2.9 billion, which was an increase of 12% year over year on the back of top-line growth, which stood at 10%.
Bank of Montreal continues to invest in its businesses to deliver robust returns to investors while focusing on efficiency improvements. It delivered positive operating leverage of 2.1% while its efficiency ratio improved by 110 basis points to 55.7%.
Due to an uncertain macro-environment, BMO confirmed its leadership is risk, and balance sheet management is a key differentiator, which has contributed towards a solid capital position for the company.
BMO stock is trading at an attractive valuation
BMO has a well-diversified business that delivers resilient and consistent earnings growth across business cycles. It is among the top 10 lenders in North America with a well-established and highly profitable flagship banking business in Canada.
Due to its improving financials and widening profit margins, BMO has managed to increase dividend payments at an annual rate of 4% in the last decade. Investors should note that dividend increases are on the horizon for Canadian banks, including BMO, as payout restrictions have been lifted considering the ongoing economic recovery.
BMO already offers a tasty dividend yield of 3.3%, making it an attractive bet for income investors. The stock is also undervalued given its trading at a forward price-to-fiscal-2022 earnings multiple of 10.3. Comparatively, analysts expect earnings to grow at an annual rate of 20.54% in the next five years.
The Foolish takeaway
BMO is a banking powerhouse with $971 billion in assets, making it the eighth-largest bank in North America by assets. It serves 12 million customers all around the world and is well capitalized with an attractive dividend yield.
Analysts tracking the stock have a 12-month average price target of $144 for BMO stock, which is over 12% higher than its current trading price. After accounting for BMO’s dividend yield, annual returns will be closer to 15%.
