Stock Analysis

Bank of Montreal (TSE:BMO) Has Announced That It Will Be Increasing Its Dividend To CA$1.51

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The board of Bank of Montreal (TSE:BMO) has announced that it will be paying its dividend of CA$1.51 on the 27th of February, an increased payment from last year's comparable dividend. This makes the dividend yield about the same as the industry average at 5.3%.

See our latest analysis for Bank of Montreal

Bank of Montreal's Payment Expected To Have Solid Earnings Coverage

Solid dividend yields are great, but they only really help us if the payment is sustainable.

Bank of Montreal has a long history of paying out dividends, with its current track record at a minimum of 10 years. But while this history shows that the company was able to sustain its dividend for a decent period of time, its most recent earnings report shows that the company did not make enough earnings to cover its dividend payout. This is very worrying for shareholders, as this shows that Bank of Montreal will not be able to sustain its dividend at its current rate.

Looking forward, EPS is forecast to rise by 137.1% over the next 3 years. Despite the current payout ratio being slightly elevated, analysts estimate the future payout ratio will be 51% over the same time period, which would make us comfortable with the sustainability of the dividend.

TSX:BMO Historic Dividend December 5th 2023

Bank of Montreal Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2013, the dividend has gone from CA$2.96 total annually to CA$6.04. This works out to be a compound annual growth rate (CAGR) of approximately 7.4% a year over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.

Dividend Growth Is Doubtful

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren't as good as they seem. In the last five years, Bank of Montreal's earnings per share has shrunk at approximately 7.3% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Bank of Montreal's payments are rock solid. Although they have been consistent in the past, we think the payments are a little high to be sustained. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for Bank of Montreal that investors should know about before committing capital to this stock. Is Bank of Montreal not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.