Monday, June 2, 2008

Bank of Montreal

This blog is meant for educational purposes only, and not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional.

I bought this stock (TSX code BMO) in 1983 for my Canadian Trading Account. According to Quicken, I have made return of some 16% annually (IRR - Internal Rate of Return) since 31 Dec 1987. This stock has a return of 14.3% over the last 5 years and dividends have added approximately 4% points to this annual return. Do not forget that all bank stocks have suffered of late, so this stock is currently depressed.

This stock has been growing their dividend by 17.7% yearly for the last 5 years. In 1987 my dividend income from this stock was $156 quarterly. Five years ago in 2003, my quarterly dividend was $411.84. My last quarterly dividend in February 2008 was $873.60.

The price of this stock has come down recently, but it will recover. It is a solid stock and bank stocks have fallen before because of financial crisis and Canadian banks have always recovered. Over the long term they do very well. The dividend is increasing at a much greater rate than background inflation (which runs, on a long term basis at 3% a year.) I do not expect it to do much until the end of the year, but the dividend yield is very good as it is 5.9%. Yield on this stock has been in the 3% range, so this is very good.

The spreadsheet I have placed below will show mostly the past. The earnings and cash flow are uneven. All banks are like this. However, over the long term, banks, especially in Canada, make money. You get the benefits of this as they pay good dividends, and the stock price goes up over the long term. Comparing Bank of Montreal with the S&P/TSX composite index, you will see that it is not doing as well. This is to be expected as no banks are doing well currently. It is also not doing as well as the S&P/TSX capped financial index. The banks and especially the Bank of Montreal, are out if favor at the moment, so I would not expect anything else.

There is one school of thought that you should buy good dividend paying stocks when the yield is high. This stock certainly fits that bill. It is a good stock and the yield is above normal for this stock. This is, of course, a good strategy if you are buying for the long term. In the short term, I expect the Bank of Montreal’s stock price to go no where, but you will be collecting a good dividend. The yield will eventually go back to its normal 3%, which implies that the stock will increase in value in the future. I do not know when this will happen, but in the meantime take the dividend until the stock price improves. The dividend is safe. In times like this, bank dividends tend to increase slower than usual. That is all.

However, that is not to say that all is well with this stock. The concern I have is that the bank’s revenue is not increasing much and that the stock price is increasing faster than the book value, or shareowner’s equity.

See my spreadsheet at See my website at

If you email me with questions on this blog, start the subject line off with the word “blog” so that your email does not end up in my junk mail folder. To get my email address, click on “Profile”.

BMO is a bank. They offer personal and corporate banking and wealth management services in Canada and US, which includes looking after banking, financing, investing, credit card and insurance needs. They offer mortgages and mutual funds and they offer full service and on-line brokerage services. It is an international bank with banking in Canada and US. They also have clients, corporate, institutional and governmental, in UK, Europe, Asia and South America.

No comments:

Post a Comment