A High-Yield Bank Stock at a Reasonable Price

Investors looking for high dividend yields in an industry that is set up well to profit from a rising interest rate environment should consider banks – and in particular a high-yield bank stock that boasts a 4.5% dividend yield.
I’m referring to Bank of Montreal (NYSE: BMO).
Bank of Montreal’s underlying fundamentals have improved throughout 2015, and the company’s financial position is poised to perform even better next year and beyond. With the Federal Reserve raising interest rates on Wednesday for the first time in nearly a decade, bank stocks like Bank of Montreal are very well positioned.

Loan Portfolio Metrics Are Improving

Last quarter, Bank of Montreal reported a 17% increase in earnings per share. In U.S. dollar terms, the company earned $1.39 per share on $3.77 billion of revenue. The results beat analyst expectations, which called for $1.32 per share of profit. For the full fiscal year, net income rose 2%.
One of the biggest reasons behind Bank of Montreal’s strong results is its improving loan portfolio. It reserved $128 million for credit losses last quarter, down from $170 million. In addition, the bank reported a satisfactory 10.7% Basel III Common Equity Tier 1 ratio. This demonstrates the gradual economic recovery in North America.
Reflecting its strong year, the company raised its quarterly dividend to $0.84 per share, up 2.4% from the previous level. On an annualized basis, Bank of Montreal’s new dividend rate of $3.36 per share represents a hefty 4.5% yield. (For similar high-yielders, click here.)
Along with its dividend hike, the company also announced its intention to repurchase up to 15 million shares of its stock. This represents approximately 2% of the company’s existing shares outstanding. It will help generate earnings growth in future quarters, since fewer outstanding shares means each remaining share is entitled to a greater portion of earnings.
It is understandable why management is so confident about the future. Rising interest rates are a compelling future growth catalyst for Bank of Montreal.

Momentum Building Into 2016

Last quarter, Bank of Montreal’s U.S. Personal and Commercial Banking segment generated flat revenue year-over-year, which was weighed down by lower net interest margin. Company-wide net interest margin contracted to 1.57%, down from 1.6% in the year-over-year quarter.
Going forward, the biggest catalyst that would help Bank of Montreal is a continued rise in interest rates. As a major financial institution, Bank of Montreal’s business model is to take in deposits and make loans. The company earns a profit on the spread between the interest it pays on deposits and generates on its loans. This is referred to as the interest rate spread. When interest rates rise, it increases the spread, since the additional interest received on longer-dated loans exceeds the extra interest paid on shorter-term deposits.
As a result, when interest rates rise, banks’ net interest margin rises as well. Last quarter, Bank of Montreal’s net interest income rose 9% year-over-year. That is a satisfactory result, as growth was helped by loan volume growth. However, its growth was hurt by lower net interest margin.
If interest rates continue to gradually rise, Bank of Montreal’s net interest income could conceivably grow at double-digit rates.

Cheap Stock With a High Yield

Investors are pessimistic about Bank of Montreal, even as its fundamental picture improves to close out 2015. The stock has lost 18.5% year-to-date, as investors are concerned about the company’s stagnating revenue and lack of stronger earnings growth. But rising interest rates are a forward catalyst for higher growth next year and beyond.
This could be an attractive buying opportunity for Bank of Montreal shares. The stock trades for just 7.5 times next year’s earnings expectations. In addition, it’s valued at a reasonable 1.3 times book value, and its 4.5% yield is more than twice the average yield of the S&P 500 index.

Organize Your Dividends With One Step

Do you know when your next dividend stock pays out? Do you know when the dividend stock you want to buy more of pays out — and how much? We’ve put together a simple calendar that highlights many of the market’s best dividends into one easy to scan document. Read it once, and you’ll see how to set up a 12 month dividend stream to ensure income all year long.

Click here to see the full details of the Dividend Calendar…