Bank of Montreal

Canada's oldest bank

Even though I've been a shareholder since 1999, I've only really been dealing intensively with the stock market and finance since 2011. Since then I've also been increasingly invested in dividend stocks. And I'm well aware that since 2011 I've been through a wonderful economic phase. I haven't yet actively experienced a real financial crisis like the one from 2007 to 2009. Anyone who was invested in bank stocks back then probably suffered a lot. But are all bank stocks now the work of the devil, and should you rather keep your hands off the entire industry?

I say clearly no, because there are some quite interesting banks you should definitely take a closer look at. For example the Bank of Nova Scotia or the Bank of Montreal. Yes, another Canadian bank stock, and this time even one that has been paying a dividend since 1828. PS: That wasn't a typo ...

The history and business model of the Bank of Montreal

We owe the founding of the Bank of Montreal in part to the Scotsman John Richardson. He was born in 1754 and grew up in Portsoy, Scotland. His father Thomas worked as a successful merchant and introduced his son to this line of business quite early on. After his arts education at King's College in Aberdeen, John moved to America in 1773. There he worked for his uncle James Phynn, who ran the successful fur trading firm Phynn, Ellice & Co. in Schenectady in the state of New York. Shortly before the American Revolutionary War broke out, Phynn and his business partner Alexander Ellice decided to set up a branch in London and also move the company's headquarters to Montreal. After the war, John Richardson was sent to Montreal to reorganize the business there together with his cousin. In 1798 the two merged several smaller businesses to form the XY Company. As John kept looking for a way to take out loans, secure his savings and exchange foreign currencies, he teamed up with 8 other businessmen to found the Montreal Bank on June 23, 1817. This made it the country's first officially registered bank.

The Montreal Bank grew rapidly. Almost immediately after its founding, it became the central bank of the government of Lower Canada. It opened several offices in the area and also began working with other banks in London, New York and Boston. At one point the Americans needed a large quantity of Spanish silver dollars for trade with China and the East Indies. But since their reserves were exhausted, the Montreal Bank had to help out. So they sent a total of about 130,000 silver coins, packed in 65 wooden barrels of 100 pounds (approx. 45 kg) each, by stagecoach over primitive roads through the mountains to Boston. That was the bank's first foreign exchange transaction. In 1822 the bank was converted from a private company into a joint-stock company with 144 shareholders. Since then it has also been officially known as the Bank of Montreal. In 1828 these shareholders already received their first profit distribution in the form of dividends. And from 1864 on, it also became Canada's official central bank. That made it responsible for financing a number of government projects, such as the construction of the first transcontinental railway.

Even though it's no longer Canada's central bank today, it's still one of the largest banks in North America. It now serves more than 12 million customers and earns its money in retail and commercial banking, wealth management and investment banking.

What are the Bank of Montreal's future prospects?

There's no question that bank stocks have been really unsexy since the financial crisis. And I'd definitely keep my hands off most banks, too. Just take a look at the long-term share prices of a Deutsche Bank, a Commerzbank or a Citigroup. For dividend investors, too, the financial crisis was a real tragedy with stocks like these. Many banks had to cut their dividends, if not eliminate them entirely. So how is it that Canada's banks got off almost unscathed? Well, that's down to the government, which mandated various regulations long before the financial crisis. Back in 2005, for example, banks were already prohibited from trading structured products. So they were forced to keep their hands off securitized loan portfolios, which later were one of the triggers of the crisis. Even though the banks were annoyed back then because competing banks were raking in fat profits, they were grateful later. Even the World Economic Forum recognized Canada for having the soundest banking system in the world. Germany and the USA, by the way, came in at 39th and 40th place! Boring is sexy after all :-)

You do have to admit, though, that the share prices of Canadian banks haven't done particularly well since then either. They didn't crash like other banks, but they couldn't really climb either. I think that's simply because investors have been rather afraid to invest in the banking system ever since. So a lucrative opportunity may present itself here, because a successful and growing global economy simply needs good banks.

And what about the dividend?

As mentioned above, the Bank of Montreal has been paying a dividend to its shareholders year after year since 1828. If that's not a sign of a rock-solid business model, what is?! The dividend yield is currently a juicy 4 percent, with a payout ratio of around 46 percent. However, you also have to admit that the dividend growth rate here, at only about 3 percent, is relatively low. By the way, it can't call itself a Dividend King, since at times it didn't raise the dividend. Kings must always pay & raise.

Conclusion:
For me, the Bank of Montreal is undoubtedly one of the banks I'd happily invest my money in. It has built a broad and growing customer base and is active in various business areas. If retail banking isn't going as well as hoped, for example, there's still wealth management to cushion the whole thing. Especially for income-oriented dividend investors, an investment here can be worthwhile.