Thursday, August 9, 2012

Recent Buy: Bank of Montreal (BMO)


The markets continued their decline this week, with the TSX breaking below the psychological 12,000 level. Although the losing streak appeared to take a turn upwards on Wednesday morning, many investors are still remaining on the sidelines.   Whether the markets will continue to decline in another sell-off, or continue on another Bull Run is anyone’s guess. When markets dip, it’s an opportune time to buy shares of companies on your watch list, or top-up current holdings.
Having sold my index equity funds back in early March, I was delighted when markets began their decline this April. It presented an opportunity to buy some good companies on sale for my TFSA (Tax Free Savings Account).  After all stocks have had a good run-up of late. With a few thousand in cash to go shopping for stocks I bought 100 shares in Husky Energy, and on Tuesday I used the remaining cash on hand, to purchase shares in the Bank of Montreal (BMO) at $58 per share. This will be a long term holding I will be adding to in the years to come. In fact, I’m already DRIPping shares of BMO with Computershare. Eventually I’ll add the Computershare BMO shares into my TFSA with TD Waterhouse, and DRIP the full shares there tax-free!

About BMO 

BMO is Canada’s 4th largest bank (see table below) with a market capitalization of 37.2 billion dollars, and most importantly a generous dividend yield of 4.8%. BMO has a current Dividend Payout Ratio of 49.73.  BMO also has a profit margin of 25.9% and a one year return on equity of 13.48%. The Bank of Montreal makes money from interest on lines of credit, mortgages, and credit cards, as well as insurance and various processing fees. And of course BMO Asset Management runs various mutual funds and ETFs – ZWB being one of the most popular ETF’s in Canada. Even with nominal interest rates, the Canadian banks are still making money hand over fist, and continue to be some of the most profitable and stable businesses in North America.
Here is a quick comparison of the Canadian Banks:
Bank NameSymbolMarket CapPriceEPSDividendDPR*Yield
Bank of MontrealBMO37.2 B58.245.632.8049.734.8%
Bank of Nova ScotiaBNS60.5 B54.914.772.2046.124.0%
CIBCCM30.2 B75.217.353.6048.984.8%
National Bank of CanadaNA12.5 B77.957.123.0042.133.9%
Royal Bank of CanadaRY81.1 B56.304.322.2852.774.1%
TD BankTD74.9 B82.926.312.8845.643.5%
*DPR = Dividend Payout Ratio (EPS/Annual Dividend x 100). Note the EPS of 3.26 for RY as provided by the Globe and Mail was incorrect. The correct EPS is 4.32 resulting in a DPR of 52%.

After the Financial Crisis

Back in October 2010, I wrote a post Are the Canadian Banks Overvalued. In that post I looked at some of the reasons why Canadian Banks have done so well, and I also looked at their huge run-up in share price since their lows in 2009. BMO had the highest gain of over 112%. Interestingly BMO was trading around $60 back in October 2010, not much different than it is now. But of course, you can count on the 4.7% annual dividend yield. Had you bought shares of BMO back in March 2009 you would have already doubled your money and been paid to wait with the generous  dividend. ;)

What Are The Risks?





One thing you have to consider with the Canadian Banks however is debt. While they don’t appear to have any debt on the balance sheets – they are actually in the business of debt. Banks are the only business I am aware of where debt is considered an asset. These assets includes lines of credit to consumers and business, consumer credit card balances, and of course residential mortgages. So figuratively speaking, the Canadian Banks are up to their eyeballs in debt.
So far banks have been doing well with low interest rates, but as David Trahair pointed out in his recent book Crushing Debt, a sudden shock to the financial system, or a sudden or sustained rise in interest rates, will put pressure on consumers, many of whom are already simply making ends meet. Banks can handle a degree of bad debts, or loan loss provisions as they call them. However a significant degree of provisions would definitely impact their bottom line. Recently the Volcker Ruling in the U.S. may also have an impact on Canadian Banks. Nonetheless, I’m certain the Canadian Banks will weather whatever is thrown at them in the years to come.
Readers, what’s your take? Do you own BMO or are you interested in buying it? What do you think of the Canadian Banks?
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