Is Now a Good Time to Invest in BMO Stock?

Down 20% from all-time highs, BMO stock trades at a cheap valuation and at a discount to consensus price target estimates.

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The ongoing volatility surrounding Canadian bank stocks provides investors an opportunity to buy the dip and benefit from a tasty dividend yield. One such blue-chip, high-yield TSX stock is Bank of Montreal (TSX:BMO). Valued at $90 billion by market cap, BMO stock offers you a tasty dividend yield of 4.9%.

Let’s see if you should buy BMO stock for its high dividend yield today.

How did BMO perform in fiscal Q1 of 2024?

In the fiscal first quarter (Q1) of 2024 (ended in January), BMO reported a net income of $1.9 billion and adjusted earnings of $2.56 per share. While the macro environment constrained top-line growth for BMO in Q1, its diversified revenue streams, strong performance from the personal and commercial businesses, and strategic acquisitions allowed it to increase sales by 10% year over year.

BMO strengthened its capital position with a CET1 (common equity tier-one) ratio of 12.8%, an increase of 30 basis points compared to Q4 of 2023. The banking giant is focused on optimizing its balance sheet and supporting client growth to tide over a volatile economy.

BMO completed the acquisition of Bank at the West and expects to lower costs by more than $1 billion due to synergies, around 20% higher than initial estimates. Additionally, it remains on track to deliver $400 million of expense savings by the end of 2024 due to operational efficiencies.

During its earnings call, BMO’s chief executive officer, Darryl White, stated, “We’ve reduced expenses by 4% from last quarter and remain focused on returning to positive operating leverage beginning next quarter.”

Similar to other legacy banks in Canada, BMO aims to expand its customer base by widening its portfolio of digitally powered products and solutions. For example, the BMO Eclipse RISE Visa Card has already attracted 15,000 new accounts, since its launch in December 2023. BMO continues to attract newcomers to Canada with a plethora of digital offerings as new accounts rose 35% year over year.

Is BMO stock undervalued?

BMO is forecast to increase adjusted earnings from $11.73 per share in fiscal 2024 to $12.49 per share in fiscal 2025, pricing it at 11 times forward earnings. In the next five years, adjusted earnings are forecast to expand by more than 6% annually, which should support dividend hikes, too.

BMO and the other big Canadian banks enjoy an entrenched position in the country as the banking industry is heavily regulated. This allows BMO and its peers to gain market share at a sustainable pace and maintain dividends across market cycles.

BMO pays shareholders an annual dividend of $6.04 per share. In the last 20 years, these payouts have risen by 7.6% annually, which is exceptional for a company part of a cyclical sector. Analysts remain bullish and expect BMO stock to gain 8% in the next 12 months.

The Foolish takeaway

Investing in the Bank of Montreal should allow you to benefit from steady gains in 2024 and beyond. Moreover, its consistent dividend payout should help shareholders enhance the effective yield over time. One easy way to gain exposure to BMO is by investing in iShares S&P/TSX Index ETF. As of March 2024, BMO stock accounts for 3.57% of the XIU ETF.

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 recommends Visa. The Motley Fool has a disclosure policy.

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