BMO's yield at bursting point
Monday, March 17, 2008
When the Bank of Montreal’s dividend yield rose above 5 per cent late last year – thanks to its declining share price, not a rising dividend – many investors wondered if the market was sending an early signal that the dividend was at risk.
Now the yield is above 7 per cent, and the early signal has turned into a flashing red light: The market is saying the dividend is toast. Is the market right?
On Monday afternoon, BMO’s shares fell to a five-and-a-half year low of $38.60, down $1.57, driving its dividend yield up to 7.2 per cent. Just a year ago, BMO’s shares were trading at $72.75 and the yield was just 3.7 per cent. In other words, the share price nearly has been sliced in half and the yield has almost doubled.
What makes the situation look even more precarious is that the yield on the 10-year Government of Canada bond, which acts as a benchmark for equity yields, has moved in the opposite direction. Over the same period, its yield has tumbled from 4.7 per cent to just 3.4 per cent as investors scramble for safety – creating a canyon-wide spread between it and BMO’s yield.
“The Street is betting that they will cut the dividend,” said David Rea, chairman of Davis-Rea. “There used to be a 65 per cent spread between the 10-year bond and the bank yields. That’s all out of whack now because of the decline in the valuations of the banks.”
BMO stands out though. The yield for Toronto-Dominion Bank, one of the best performers in its group during recent volatility, stands at 4 per cent. Bank of Nova Scotia’s yield is only slightly higher, at 4.4 per cent. In this context, BMO dividend looks very stretched – and the collapse of Bear Stearns & Co. is a sober reminder that bad things can indeed happen to institutions that once appeared rock solid.
Mr. Rea thinks BMO will do everything it can to preserve its dividend but said it is “hard to say” whether they will succeed.
John Kinsey, portfolio manager at Caldwell Securities, said BMO’s basic problem is that it doesn’t know what it wants to do.
“The depth and breadth of the situation, I don’t think anyone knows,” Mr. Kinsey said. “Until the situation is clarified, I suspect BMO will continue to work hard on it and probably stretch out the problem as long as they can.”
Under that scenario, he believes the dividend is probably safe. But if the bank raises money through an equity offering, it would have to spread its payouts over a larger number of shares, putting more strain on its capital. Under that scenario, BMO might have to cut the dividend.
However, there is an upside here that the Street may be overlooking. Even if BMO cuts its quarterly dividend in half, the yield would still be an attractive 3.6 per cent.
© Copyright The Globe and Mail
|
