BMO Stock: Here’s What to Expect in 2023

BMO stock is valued at a reasonable multiple and is well poised to deliver stellar gains to shareholders in the next year.

| More on:
Business people shaking hands

Image source: Getty Images

Banking stocks significantly underperformed the broader markets in 2022 due to a range of macroeconomic challenges. Investors were worried about the triple whammy of inflation, geopolitical tensions, and rising interest rates, all of which impacted the Bank of Montreal (TSX:BMO) and its peers last year. Currently, BMO stock is trading 14% below all-time highs, valuing the financial giant at a market cap of $92.7 billion.

The banking sector is extremely cyclical and moves in line with the economy. So, in periods of economic contraction, bank stocks lose momentum but stage a turnaround when the economy expands.

So, amidst the ongoing sell-off, investors can buy a quality stock at a discount that also offers shareholders a tasty dividend yield. Let’s see what you can expect from BMO stock in 2023.

Is BMO stock a buy?

The Canadian banking industry is quite conservative compared to its counterparts in the United States. But due to their conservative nature, BMO and its peers have comfortably navigated several economic recessions in the past.

For instance, several banks south of the border cut or suspended dividends during the financial crisis of 2009. BMO and most Canadian big banks maintained these payments, showcasing the robustness of their balance sheets.

In the last 20 years, BMO has increased dividends at an annual rate of 7.5%, which is quite impressive as the world has wrestled with the dot-com bubble, a housing crisis, and a global pandemic in this period.

BMO stock offers investors an annual payout of $5.72 per share, indicating a forward yield of 4.4%. With a payout ratio below 50%, BMO’s dividends are quite sustainable.

Further, BMO’s balance sheet is well capitalized as the company has a Tier 1 Capital Ratio of 15.8%, which is the highest among all North American banks. So, the Bank of Montreal is well-positioned to deliver market-beating gains to investors even if recession fears come true.

BMO has now paid shareholders a dividend for 193 consecutive years, the longest streak among Canadian companies.

What next for BMO stock and investors?

While BMO has an established presence in Canada, it is gaining traction in the much bigger market in the U.S. The U.S. presence allows the bank to consistently grow its earnings over time. While BMO generates 60% of earnings from Canada, the U.S. accounts for 40% of total net income. In late 2021, BMO also acquired Bank of the West, making it the eighth-largest bank in North America.

Despite a weak macro environment, BMO is expected to increase its adjusted earnings from $13.2 per share in fiscal 2022 to $14.25 per share in fiscal 2024. In the next five years, adjusted earnings could increase at an annual rate of 6.2%.

So, BMO stock is priced at just over nine times 2024 earnings. This valuation is quite reasonable given its dividend yield and earnings expansion.

Analysts remain bullish on BMO stock and expect it to surge 10% in the next 12 months. After accounting for its dividends, the bank should deliver total returns closer to 15% in the next year.

If you expect the economy to recover in the second half of CY 2023, it makes sense to buy and hold BMO stock right now.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Bank Stocks

stock research, analyze data
Bank Stocks

Better Buy: TD Stock or Bank of Nova Scotia?

TD Bank and Bank of Nova Scotia still look cheap. Is one a good buy today?

Read more »

edit Four girl friends withdrawing money from credit card at ATM
Bank Stocks

2 Top TSX Bank Stocks to Buy in February 2023

Here's why Toronto-Dominion Bank (TSX:TD) and Bank of Nova Scotia (TSX:BNS) are two top TSX bank stocks to consider right…

Read more »

grow money, wealth build
Bank Stocks

TFSA Investors: A Big Bank Stock That Pays Almost 6% in Dividend Income

A Big Bank stock is an ideal core holding in a TFSA, not only for its financial stability but also…

Read more »

Target. Stand out from the crowd
Bank Stocks

BMO Stock looks Better Than its Peers in January 2023

What's next for BMO stock after a downfall in 2022?

Read more »

Bank sign on traditional europe building facade
Bank Stocks

As Banks Expand South of the Border, Which Is the Better Bet for Growth?

Canada’s big banks are expanding into the U.S. market. Here’s a look at which of these titans is a better…

Read more »

Young woman sat at laptop by a window
Bank Stocks

Could BMO Stock Be a Big Winner in 2023?

Long-term investors should take a closer look at BMO stock as a potential core holding, especially on dips.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Tech Stocks

TFSA Passive Income: How I’m Investing to Make $2,000/Year From Dividends

I am increasing my dividend income by investing in dividend stocks like the Toronto-Dominion Bank.

Read more »

Make a choice, path to success, sign
Bank Stocks

Of the Big 6 Bank Stocks: Buy This, Not That

CIBC (TSX:CM) is an interesting Big Six bank stock to buy right now.

Read more »