Why Have Bank of Montreal (TSX:BMO) Stock in Your Portfolio?

Bank of Montreal is a solid bet for investors seeking regular income along with solid growth.

| More on:
thinking

Image source: Getty Images

Loan growth, rising interest rates, and an uptick in commercial activities suggest better days ahead for banks. However, the higher inflation and the Russia/Ukraine conflict pose near-term challenges.

As for Bank of Montreal (TSX:BMO)(NYSE:BMO), its shares have recovered sharply from the pandemic lows and delivered exceptional returns. Further, the past year has been profitable as recovery in the economy, lower provisions, and cost-control measures led Bank of Montreal to deliver robust profit and lift shareholders’ returns through higher dividend. 

Strong start to FY22

After a strong performance in FY21, the momentum in Bank of Montreal’s business continued in FY22. The bank delivered solid Q1 performance to start the year on a solid note. For context, Bank of Montreal posted adjusted earnings of $3.89 per share in Q1, representing year-over-year growth of 27%. Further, its pre-provision pre-tax earnings increased by 18% to $3.3 billion. 

Q1 highlighted the strength in its P&C (personal & commercial) segment in Canada and the U.S., led by higher commercial loans and lower provisions. Further, momentum in the capital markets and wealth management division is encouraging. 

Now what?

I expect the momentum in its P&C business to sustain on the back of higher commercial loans. Its innovative products, investments in key customer-facing roles, and enhanced digital experience position it well to capitalize on the recovery in consumer activity and drive commercial loans. Further, its expansion in the U.S. and new client acquisitions bode well for growth in the U.S. P&C segment. 

Overall, Bank of Montreal’s investments in sales and digital capabilities, diversified revenue base, accelerating loan growth, rising interest rates, and continued focus on operating efficiency will likely support its financial performance and margins. Further, its acquisition of Bank of West could drive scale and growth for Bank for Montreal in the U.S. segment. 

Well positioned to enhance shareholders’ value

Bank of Montreal has been famous for consistently enhancing its shareholders’ value for decades. It has continually paid dividend for 193 years. Moreover, Bank of Montreal’s dividend has grown at a CAGR of over 4% in the last 15 years. 

Last year, Bank of Montreal announced a 25% hike in its dividend. Moreover, the ongoing strength in its business, diversified revenue base, and operating leverage could drive its bottom-line growth and support higher dividend payments. 

Bottom line 

The current macro and geopolitical environment could create short-term challenges. However, the uptick in loans and deposits volume, its focus on efficiency, strong credit performance, and strength in its balance sheet position Bank of Montreal well to deliver solid financials and boost shareholders’ value. 

Despite an appreciation in price, Bank of Montreal stock is trading at a forward P/E multiple of 10.7 and a P/BV multiple of 1.6. These valuation multiples compare favorably to the peer group average. Further, they are in line with its historical average. 

Overall, ongoing momentum in its business and strong dividend payments (current yield of 3.7%) support my bullish outlook. Further, its valuation is well within investors’ reach. 

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 Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Bank Stocks

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

analyze data
Bank Stocks

The Average Canadian Stock Investor Owns This 1 Stock: Do You?

This Canadian stock has about 49% ownership by the public, and with growth and dividends to consider, it's a top…

Read more »

falling red arrow and lifting
Stocks for Beginners

1 Dividend Stock Down 18% to Buy Right Now

CIBC (TSX:CM) is a strong dividend stock investors should certainly consider not just for passive income, but future growth as…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Tech Stocks

Forget TD Stock: 2 Tech Stocks to Buy Instead

TD remains a solid income stock but two outperforming tech stocks are better buys for their strong growth and upside…

Read more »

Question marks in a pile
Bank Stocks

Where Will Royal Bank of Canada Stock Be in 5 Years?

Royal Bank's continued focus on a strong capital position plus its acquisition of HSBC will likely ensure prosperous times ahead.

Read more »

Payday ringed on a calendar
Bank Stocks

How to Build a Bulletproof Monthly Passive-Income Portfolio With Just $10,000 and TD Stock

TD (TSX:TD) stock has been a poor performer over the last few years, but could be a big passive-income winner…

Read more »

Man considering whether to sell or buy
Bank Stocks

Is RBC Stock a Buy, Sell, or Hold?

Shares of Royal Bank of Canada have delivered game-changing returns to shareholders in the last two decades. Is RBC stock…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

Is Scotiabank (BNS) Stock a Buy, Sell, or Hold?

Let's dive into whether the Bank of Nova Scotia (TSX:BNS) remains a solid buy or if it's more of a…

Read more »