Bank of Montreal: This Foreign Bank’s 5.1% Yield Remains Safe
A Top Dividend Stock from the Banking Industry
If you’ve been following my column, you’d know that one of the reasons I like Canadian banks is that they often offer higher dividend yields than their U.S. counterparts. For instance, Bank of Montreal (NYSE:BMO) currently pays 5.1%, which is quite impressive in today’s low-yield environment.
Of course, we live in an extraordinary time, when even some of the blue-chip names have had to cut their dividends. So, it makes sense for income investors to be extra-cautious, especially when they approach high-yield stocks.
The good news is that, although the COVID-19 pandemic has resulted in an economic downturn around the globe, the dividends from Bank of Montreal remain safe.
Let me explain.
Founded in Montreal, Quebec, Canada as Montreal Bank in 1817, BMO has grown into a multinational financial services company. It is currently one of the “Big Five” banks in Canada and the eighth-largest bank in North America by assets.
With a customer base of over 12 million, BMO provides a wide range of personal and commercial banking, wealth management, and investment services.
As I mentioned earlier, BMO stock stands out because of its oversized dividend yield. But, of course, if you use a stock screener, you can easily find companies that offer higher yields than BMO’s five percent.
The real reason I’m digging Bank of Montreal is how durable the payout is.
Consider this: BMO has been paying uninterrupted dividends for 191 years. That’s the longest-running dividend payout record of any company in Canada. (Source: “Q2’20 Fact Sheet,” Bank of Montreal, last accessed September 4, 2020.)
And even after paying continuous dividends for nearly two centuries, the company’s payout has been on the rise.
Over the past five years, BMO stock’s quarterly dividend rate went from CA$0.82 per share to CA$1.06 per share, translating to a total increase of 29.3%. (Source: “Dividend Information,” Bank of Montreal, last accessed September 4, 2020.)
Obviously, now is the perfect time to insert the warning “past performance is no guarantee of future results.”
With the outbreak of COVID-19, many regions imposed lockdowns. Numerous businesses had to close their doors and unemployment shot up. According to the Bureau of Economic Analysis’ latest estimate, real gross domestic product (GDP) in the U.S. declined at an annual rate of 31.7% in the second quarter of 2020. (Source “Gross Domestic Product, 2nd Quarter 2020 (Second Estimate); Corporate Profits, 2nd Quarter 2020 (Preliminary Estimate),” Bureau of Economic Analysis, August 27, 2020.)
And while the big banks are considered blue-chip stocks, there has been some concern about their dividend safety. After all, Wells Fargo & Co (NYSE:WFC), the third-largest bank in America with almost $2.0 trillion in assets, recently reduced its quarterly cash dividend from $0.51 per share to $0.10. (Source: “Wells Fargo Reports Second Quarter 2020 Net Loss of $2.4 Billion, which Included an $8.4 Billion Increase in the Credit Loss Reserve Driven by Current and Forecasted Economic Conditions,” Wells Fargo & Co, July 14, 2020.)
Given the circumstances, should investors worry about the safety of the oversized dividends from BMO stock?
Well, a look at the financials should be reassuring.
On August 25, the board of directors of Bank of Montreal declared a quarterly cash dividend of CA$1.06 per share, an amount that’s in line with the bank’s previous payout. The dividend will be paid on November 26 to shareholders of record as of November 2. (Source: “BMO Financial Group Declares Dividends,” Bank of Montreal, August 25, 2020.)
Looking at the company’s latest earnings report, we can see that Bank of Montreal generated CA$6.0 billion in revenue (net of claims, commissions, and changes in policy benefit liabilities) in the third quarter of its fiscal year 2020, which ended July 31. The amount represented a 3.8% increase year-over-year, which is pretty impressive, given the challenging operating environment. (Source: “BMO Financial Group Reports Third Quarter 2020 Results,” Bank of Montreal, August 25, 2020.)
The bottom line was impacted by CA$1.1 billion in provisions for credit losses (PCL). While the amount was much bigger than the CA$306.0 million in PCL a year ago, it was smaller than the CA$1.1 billion in PCL in the previous quarter.
As a result, Bank of Montreal earned net income of CA$1.2 billion in the third fiscal quarter, down from the CA$1.6 billion a year ago.
Here’s the neat part: BMO’s adjusted earnings came in at CA$1.85 per share for the reporting quarter. Despite this amount being lower year-over-year, it handily beat analysts’ estimate of CA$1.73 per share. At the same time, the adjusted profit covered BMO stock’s CA$1.06 quarterly dividend payment with ease.
Bottom Line on Bank of Montreal
Put it together and it’s easy to see why BMO stock is special. The bank has an incredible history of returning cash to investors and it has been generating solid financials to back its payout even during this unprecedented operating environment. And because the payout ratio is so conservative, there is a good chance the company can maintain the dividend even if the recession worsens.
As it stands, the 5.1% yield from Bank of Montreal could be an opportunity for income investors.