BMO Bank of Montreal

[Square Root]

The alternative of a DRIP discount is to raise equity and pay the 3-4% sales commission that goes with it. Just read a report this AM that highlighted the capital needs of most of the banks in order to meet the new Basle iii rules that come into force for Q1 2013. So if you need capital (and most of the banks do) DRIP discounts are the cheapest way to go. if you need capital you generally don't want to have a high dividend payout ratio. The issue is you also don't want to play around with the payout ratio too often as that confuses and irritates investors. BMO has always had a high payout ratio as they were historically a low growth bank. This may have changed with their US purchase stategy. In my view their payout ratio may be too high but they probably don't want to adjust down at this time. Issuing shares does cost shareholders if the capital isn't needed, even if they are issued from treasury. A 2% discount may not seem like much but it would add up to around $40million a year for the 3 largest banks.
In my working career I dealt with these issues at the board level every quarter so I have a pretty good understanding of the issues that come into play. Every quarter I had to justify our DRIP stategy to the board given our capital plan.

[scomac]

So what your really saying is that BMO is a victim of a dividend policy that was conceived prior to the credit crisis and the advent of new regulatory capital requirements. if they had a do over, it's likely that they would have chosen to keep the target payout ratio lower inlight of the new rules. Cutting the dividend is suicide especially if the intention is to raise capital going forward. Just look at the premium that Manulife is forced to pay.

The best that they could hope for is that earnings growth will redress the payout ratio issue and institute a DRiP discount to encourage shareholders to take shares instead of cash. While this maybe dilutive to shareholders, it doesn't cost the business operations and allows them to gradually add to capital via retained earnings.

[Cal]

Thx for the input SR.

[Square Root]

So what your really saying is that BMO is a victim of a dividend policy that was conceived prior to the credit crisis and the advent of new regulatory capital requirements. if they had a do over, it's likely that they would have chosen to keep the target payout ratio lower inlight of the new rules. Cutting the dividend is suicide especially if the intention is to raise capital going forward. Just look at the premium that Manulife is forced to pay.

The best that they could hope for is that earnings growth will redress the payout ratio issue and institute a DRiP discount to encourage shareholders to take shares instead of cash. While this maybe dilutive to shareholders, it doesn't cost the business operations and allows them to gradually add to capital via retained earnings.

Yes. I think you have described it well. As it turns put BMO isn't in the most need of capital(BNS is) and RY and CM are in very good shape. BMO would not be the obvious choice if an investor was looking for dividend increase. This would probably be TD. Keep in mind that dividends are paid out of earnings so ultimately it's earnings growth that drives dividend growth. Capital requirements are important but the banks have generally tried to keep dividends growing as long as earnings do as well.

[londoncalling]

I currently only own one of the big 5. (RY) I know the banks(as well as most sectors) have had a nice run. I would like to add BMO to my dividend portfolio. Does anybody here see a reason not to buy this stock before the next dividend? It is giving a decent yield in the 4.8% range. Any thoughts of a pullback in the coming weeks. As mentioned in other parts of the forum it is getting harder to find places to deploy money. I have my RRSP money for this year ready to deploy but am short on choices. I have 3 options (BMO,BCE and ECA) and am concerned that I may be a little late on 2 of the 3. I feel that I most likely have till fall to get into ECA. If one was to use yield alone BCE would be my first choice. However, BCE has recently raised its dividend and I don't think BMO will be raising theirs until at least the end of this year. ECA offers the lowest yield and will more than likely be in the dog house for some time. Had I had the money available to deploy when ECA was at 19 or BCE was at 39 I would have jumped on both. Thoughts?

[KaeJS]

I own all 3.

Why not buy all of them?

[doctrine]

Like BMO and BCE, not so much ECA because of nat gas price.

[gibor]

I own all 5 (one of them CM via ESP). Every bank has its pros and cons.

I was even thinking to initiate position in NA, they are the most agressive lately in rising dividends and their payout just 43%

[londoncalling]

I own all 3.

Why not buy all of them?

I plan to at some point in time. This is more of an issue of which to add when. Since these purchases will be funded with new money coming in over the next 6 months I cannot buy them all at once. Instead I can buy part positions with each contribution. I guess I could hedge and try to grab both BCE and BMO right away and maybe pick up ECA later. I always like to buy on dips but I am not too sure we'll get a pullback in the short term. I guess worse case scenario the market takes off and I am left with a pile of cash and have to restart my analysis.

doctrine: "Like BMO and BCE, not so much ECA because of nat gas price."

I like BMO and BCE as well. The reason I am interested in ECA is because of nat gas price. This one would be more of a value play for the long term. Which is why I think I have some time on this one.

gibor: "I own all 5 (one of them CM via ESP). Every bank has its pros and cons.

I was even thinking to initiate position in NA, they are the most agressive lately in rising dividends and their payout just 43%"

I hope to own all 5 eventually as the money comes available to me. I would be open to NA or CWB. I read a report some time back that showed a correlation of long term performance of bank stocks with yield and p/e. In the longer term the higher yielders tended to have a better price appreciation. Most of this is probably attributed to the cyclicality of the big 5. It seems that over time they each get a turn in the spotlight which raises price and lowers yield.

What I meant with my initial question was not so much about what to add but if it was the time to add to these. Probably with such a long horizon it may not much matter as long as the prices and yield are better than or are at historic averages. However, I like to play this game to see if I can spot price trends.

Ever since the CMF market sentiment thread started I just followed what it said. I seem to be lost since the March one hasn't been posted yet.

Thanks for your responses guys.

Cheers.

[gibor]

londoncalling, I also noticed that if 1 or 2 from big 5 lagging in specific Q/year, it will catch up in another Q/Year.
So you just can check which bank underperformed last 3 or 6 months and invest there.
Also you can check which bank is yielding currently more than on average.

I like BCE , but not less I like RCI, I have about equal allocation for both. BCE has a better current yield, RCI has much higher div growth every year (always in double digits) and better payout ratio.