Tuesday, February 5, 2019

Investing using fundamentals - BMO

The third company analyzed using the time-value spreadsheet is BMO another major Canadian Bank. Even before TD, BMO recognized the limitations of the Canadian market and expanded into the U.S. with purchases such as Harris Bank. But rather than on retail banking, BMO focussed on personal AND commercial banking. It also is more focussed on capital markets and wealth management. So the emphasis is somewhat different than TD’s.

Figure 1TD Bank fundamentals. DCF means discounted cash flow method. Click the image for a better quality view.
You may notice a small change to the spreadsheet in that ‘Total Earnings Growth’ was added.  This is a bit of extra information regarding earnings quality. The ‘Earnings Graph’ in the upper right looks very similar to that of TD and BIP. However, the slope of the trend is less. The slope is indicative of the earnings growth rate, although a bit difficult to asses. Hence the addition which shows you annual earnings growth over the last 6 and 5 years respectively. The regular trend on the graph confirms the excellent quality of earnings, dividends and management. However, annual earnings growth was 6% and 5% over 6 and 5 years respectively. This compares to earnings from TD of14% and 12% - quite a bit more than BMO and partially this is reflected in an slightly better valuation (P/E) for TD. But if you look at IRR then BMO at 12.83% is clearly less than TD at 13.7% and a lot less than BIP at 17.7%
In terms of Dividends, the forecasted dividend stream pays for the purchase of one share at current pricing in 17 years for both BMO and TD. Looking forward, the post on Royal Bank will show the same. So all three banks are very comparable in dividends but the other parameters such as IRR help to differentiate. In terms of dividend quality, we can also compare the payout ratio which is for BMO and TD: 46% and 43% respectively. But it again confirms that TD is the more promising.   
Finally, you may have noticed how little emotion is involved with this type of analysis – it is nearly mechanical.

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