Bank of Montreal (TSX:BMO) is one of Canada’s best-in-class global banks. Best known in Canada for its retail banking operations, BMO is also big in US capital markets/investment banking. Sporting a 4.5% dividend yield, BMO is one of Canada’s higher-yielding bank stocks.
Bank of Montreal’s main claim to fame is its thriving US business. BMO’s US segment includes 1,000 branches- – more than the bank has in Canada – and the investment bank BMO Capital Markets. The company’s wealth management segment, BMO Nesbitt Burns, is also well regarded.
BMO stock has performed reasonably well over the last year, rising 6.5% while paying a high dividend. However, the stock still sports a sensible valuation after all these gains. It certainly looks like a tantalizing package. In this article, I will explore BMO stock so you can decide whether it is a buy, sell, or hold for your portfolio in 2025.
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Bank of the West deal
The biggest recent news item from Bank of Montreal was its 2023 acquisition of Bank of the West, a California retail bank. BMO acquired the bank from BNP Paribas for $13.5 billion. Bank of the West does about US$1 billion in annual earnings, meaning that the price BMO paid for the bank was similar to BMO’s own valuation. So it looks like BMO got a fairly good deal from BNP Paribas.
The Bank of the West deal substantially increased BMO’s US presence, which was likely a good thing. In recent years, the US dollar has been gaining on the Canadian dollar, increasing the value of BMO’s US operations. BMO acquired Bank of the West when the US dollar was weaker than it is today, so it made Forex (foreign exchange) gains on the Bank of the West transaction. Overall, it was a significant win for Bank of Montreal.
Recent performance
Bank of Montreal has been performing well lately in fundamental terms. Its fourth quarter results missed analyst estimates, but were satisfactory in an absolute sense. In the quarter, BMO delivered:
- $2.3 billion in reported net income, up 35%.
- $1.5 billion in adjusted net income, down 31.3%.
- An 11.3% return on equity.
- A 13.6% common equity tier 1 (CET1) ratio, well above regulatory requirements.
- A 5% dividend increase.
Overall, it was a satisfactory performance.
The bank also grew considerably over the last five years, compounding its revenue at 3.3% and its earnings at 2% per year in that period. This is not explosive growth but it’s reasonable for a bank stock.
Last but not least, Bank of Montreal is highly profitable, boasting a 25% net margin and an 8% return on equity.
Valuation
Despite its solid recent performance, Bank of Montreal stock is fairly cheap, trading at 13 times earnings, 3.4 times sales, and 1.2 times book value. At a time when the S&P 500 trades for almost 30 times earnings, such multiples seem very sensible. And as mentioned previously, Bank of Montreal is a growing enterprise, with reported earnings up 35% in the most recent quarter. If the company can keep that up, it will eventually look like it was dirt cheap at today’s price.
