Dividend Analysis: Bank of Montreal (TSE:BMO)
9 July 2007There has been quite a bit of talk about Bank of Montreal and its juicy dividend of late. So let’s have a look at what all the fuss is about. Bank of Montreal trades on both the TSE and the NYSE under the symbol BMO. I will be doing the analysis from a Canadian perspective.
Company Profile:
From Reuters
Bank of Montreal (BMO) offers a range of credit and non-credit products and services. As of October 31, 2006, the Company maintained 963 bank branches in Canada and operated internationally in eight other countries, including the United States. The Harris Bankcorp, Inc. (Harris), wholly owned by BMO, operates its own community banking business in the United States, providing retail banking and private client and personal trust services, as well as corporate and investment banking. It also provides investment dealer services through the BMO Nesbitt Burns group of companies, which include BMO Nesbitt Burns Inc., which include BMO Nesbitt Burns Inc., a fully integrated Canadian investment dealer and BMO Capital Markets Corp. BMO consists of three operating groups: Personal and Commercial Banking, Private Client Group and Investment Banking Group.
BMO has a market capitalization of $34.50B.
Company Fundamentals:
As usual, finding the return on invested capital for Canadian companies is difficult. I have found the 5 year average ROIC (12.70%) and last year’s ROIC of 13.74%.
However, I do have the return on equity numbers for the whole 10 year period. They are consistent and on the rise. The 10 year average is 15.37%, the 5 year average is 16.58% and last year’s ROE was 18.40%. Good solid numbers and a nice increasing trend.
Equity growth rate has been fairly consistent over the 10 year period at right around 7%.
Earnings per share growth rate has been more volatile with a low of negative 18% to a high of almost 39%. Over the 10 years, the average EPS growth rate is almost 10%.
Sales growth rates have been holding steady at around 8%.
Dividend Fundamentals:
Current dividend yield is 3.94%. That is a healthy dividend and is much higher than the 2.35% dividend yield offered by the S&P TSX Composite .
Dividend growth rate has been excellent. Over the 10 years, the dividend growth rate has been 10.94%. However, over the last 5 years, it has been 14.59%. And in 2006, the dividend was increased 18.33%.
The dividend payout ratio has been as high as 44% back in 2002, and was sitting at 41.36% at the end of 2006.
Valuation Models:
The 5 year average high dividend yield is 3.48%. And the 10 year average high dividend yield is 3.67%. Obviously the stock is going to be trading at a discount since the current dividend yield is 3.94%. Using 3.67% as the yield that I would demand, the model price is $74.18. At close of Friday, the current price is $69.00. That is a discount of almost 7%.
Calculating the Graham number, I come up with a model price of $55.04. That would mean a premium currently exists of 25.37%.
For the discounted present value, I used the following:
- future P/E of 12.55 (the 10 year average P/E)
- future EPS growth rate of 6.94% (equity growth rate over the 10 year period). Unfortunately, I was not able to find any analyst forecasts.
- dividend yield of 3.67%
- future dividend growth of 14.59% (5 year average dividend growth rate)
Using this information, my model price is $56.96 which means a premium of 21.13%.
Both the Graham number and the discounted present value valuations came in at roughly the same amount of premium.
See my calculations here.
Conclusion:
The valuation models show conflicting results. By yield, this stock is trading at a discount. The other two valuations have it trading at roughly a 20% premium. With BMO’s recently reported losses in its natural gas trading unit ($680M) and the possibility of increasing interest rates, there may be an opportunity to buy this stock at a lower price in the near future. I would personally wait for a pullback on this one.
Full Disclosure: I currently own shares of BMO.
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on August 28th, 2007 at 9:03 pm
[…] This excellent website called Dividends Matter has an analysis on BMO which is worth checking out: http://www.dividendsmatter.com/dividend-analysis-bank-of-montreal-tsebmo/2007/07/09/ […]
on November 22nd, 2007 at 11:45 am
It appears this stock is now at a discount. Is now a good time to buy or will there be more discounting here?