The best dividend stocks are those that have managed to grow dividends consistently each year on the back of earnings and cash flow growth. Despite the cyclicality associated with bank stocks, the big Canadian banks have raised dividends across market cycles due to strong financials and a conservative approach toward lending.
For instance, Bank of Montreal (TSX:BMO) currently offers shareholders a juicy dividend yield of 5%. In the last 27 years, these payouts have risen by 8.1% annually, allowing BMO stock to crush broader market returns.
Since September 1996, BMO stock has returned 1,280% to shareholders. After adjusting for dividends, total returns are closer to 4,540%, indicating annual returns of over 15%.
Let’s see if BMO stock remains a good buy at its current valuation.
Should you invest in Bank of Montreal stock?
In fiscal Q3 2023 (ended in July), BMO reported earnings per share of $2.78. While pre-provision, pre-tax earnings were up 6% year over year, all-bank revenue grew 22% due to record results in Canadian Personal and Commercial Banking segments supported by double-digit deposit growth and the acquisition of the Bank of the West.
Bank of Montreal emphasized credit performance is normalizing in line with estimates, allowing it to maintain a strong balance sheet. It ended Q3 with a CET1 (common equity tier 1) ratio of 12.3%, which was up on a sequential basis.
The banking giant aims to adjust to a sluggish macro environment and near-term industry headwinds, which will drive adjusted earnings per share lower in fiscal 2023. Analysts expect earnings to fall by 9.8% to $11.94 per share in fiscal 2023 despite a 19.3% increase in sales.
However, BMO has a proven track record of disciplined expense management while making targeted investments. This approach has allowed BMO to enjoy a high operating leverage and increase earnings by 10% annually in the last five years.
Additionally, the Bank of the West acquisition has allowed BMO to increase its presence south of the border. Its U.S. segment has consistently contributed to BMO’s earnings growth in the past. In Q3, pre-provision, pre-tax earnings from the U.S. exceeded US$1 billion, up from US$500 million in fiscal 2019.
The company stated, “We have a differentiated position in the U.S. market, ranking in the top 10 of diversified banks while benefiting from the strength of BMO’s trillion-dollar North American balance sheet.”
What is the target price for BMO stock?
BMO confirmed its Personal and Business Banking segment reported over $2 billion in sales for the first time in Q3 and continues to grow market share. The bank has attributed customer acquisition and an uptick in customer deposits as key contributors to its growth.
The company also closed the acquisition of AIR MILES in Q3, which is Canada’s most popular loyalty program with 10 million active customers, accounting for 50% of total households in the country.
Priced at nine times fiscal 2024 earnings, BMO stock is quite cheap, given its high dividend yield and estimated earnings growth. BMO’s focus on inorganic growth should allow the bank to benefit from synergies over time, further improving profit margins and driving dividend hikes.
Analysts remain bullish and expect BMO stock to surge 13% in the next 12 months.
