Financial Jungle

Great post!

In that specific situation you described, technically it would cost you nothing above and beyond your investment cost. It would be foolish to ignore the risk that is involved though. The reward might be the dividend growth, but the risk might be further share price erosion due to one of several possible factors like intereste rate hikes, further trading losses, very slow growth etc.

Thanks for the comments, moneygardner. I’m glad I qualified by saying “… window of opportunity for aggressive investors …” Although this is not a risk-free proposition, the downside risk is minimal, since BMO had already suspended ties with Optionable.

Interest rate may go up faster than dividend hike in the short-term, so investors better have some reserves just in case.

While there may be short term downside risk, barring any structural changes to Canadian bank regulations there is little (but definitely not 0) long term risk that BMO’s shares will be worth less than their current price in the 10-20 year time horizon.

If you are looking at the leverage play as a way to buy at a good time, and are interested in paying it back over time, then I don’t see this being a strategy that will cause undue hardship even with a short term loss. Just make sure you can cover the margin call if it ever happens.

Good post - I thought you had your numbers wrong but I didn’t realize that their dividend went up.

I’ll have to follow a bit closer since I’m about to buy some myself.

I’m impressed with the dividend growth. Over the past 6 quarters, dividends were: $0.49, $0.53, $0.62, $0.62, $0.65, and now $0.68.

I own positions in BNS and TD myself and if I have no exposure to banks, I’d consider BMO. But I am extremely wary about the banks here. BMO announces troubling trading losses (troubling because it raises questions about oversight. Remember Barings?) and what does the market do? It pushes the stock down by a few points. Tells me too many people are too bullish on the banks.
I own and follow BNS and TD, so this short analysis is based on reading their annual reports. I feel BMO won’t be all that different.
In the five year period between 2001-2006, BNS’s revenue has barely budged (TD’s is up 10%). But earnings (and hence dividends) have surged dramatically. The magic: smaller credit loss provisions. The entire growth in BNS earnings can be attributed to the improving credit cycle. This is an unsustainable situation and the credit cycle will surely turn sometime in the future (don’t ask me when).
I remember reading an interview with Ed Clark (TD’s chief) in The Globe last year and he commented that he can’t recall a time when conditions were so favorable for the banks (falling interest rates, a credit cycle that keeps improving) etc. If anything, conditions have gotten even better now.

I meant to add this to the last comment:
The question is how long will this happy situation last?

I hear you. The double-digit dividend growth is not sustainable moving forward, so I’m concentrating on safety, valuation and conservative growth. I think a case can be made that BMO’s dividends are safe, because banks don’t normally raise dividends in anticipation of a cut, and a 4% yield is attractively, or at the very least, not overpriced.

All banks trade. I like BMO’s case, because they have been exposed, while others haven’t. The $600 millions trading loss (pre-tax) pales when compared to the $17 billions on balance sheet. Alas, it would’ve been nice to hop in if there was an over-correction.

ps. I’m noticing the market has been struggling the past few days. Might want to prepare a shopping list.

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