Is it too late to buy Bank of Montreal stock?

Bank of Montreal (TSX: BMO ) is about 20% above the 12-month low it hit last fall. Investors who missed the rebound are wondering whether BMO stock is still undervalued and a good buy for a self-directed tax-free savings account (TFSA) or registered retirement savings plan (RRSP) portfolio focused on dividends and total returns.

BMO stock price

Bank of Montreal is trading at about $124 per share, compared with about $103 at the end of October 2023. The stock was above $150 during the post-crash rally two years ago, so there is decent potential for further recovery.

Much of the trouble can be attributed to rising interest rates and the subsequent rise in bond yields. The Bank of Canada and the US Federal Reserve raised interest rates in an effort to cool the economy and balance the labor market. Higher borrowing costs force households to reduce discretionary spending. As demand for goods and services declines, businesses hire fewer new employees or begin downsizing. The result should be a slower rate of growth in the prices of goods and services, as bargaining is more common and workers have less leverage to demand higher wages.

The risk for Bank of Montreal and its peers is that the economy could fall into a deep recession and unemployment could rise if interest rates rise too long. Rate hikes take time to work their way through the economy, and it's difficult for central banks to know when to start cutting rates to avoid an economic downturn.

The Bank of Montreal set aside $2.2 billion to cover potential loan losses in fiscal 2023, compared with $313 million in fiscal 2022. The hike shows that leveraged borrowers are struggling with a jump in rates. This trend is expected to continue in 2024, and while the amount sounds significant, it is still small relative to the total loan portfolio of approximately $660 billion.

Bank of Montreal ended fiscal 2023 with a Common Equity Tier 1 (CET1) ratio of 12.5%. That's higher than the 11.5% required by the banking regulator, so the company has a solid capital cushion to weather ongoing economic turbulence.

Economists expect the economy to go through a short and mild recession as central banks control inflation. If this scenario plays out, BMO stock may be oversold right now.

Adjusted net income fell to $8.7 billion in fiscal 2023 from $9 billion last year, but the bank remains highly profitable and is well-positioned to benefit from long-term economic growth in both Canada and the United States.

Dividends

The Bank of Montreal has paid dividends every year since 1829. The board raised the payout twice in 2023, so management may not be too concerned about the profit outlook despite the current economic swings. Investors buying BMO stock at current levels can earn a 4.9% dividend yield.

Is it time to buy BMO stock?

Bank of Montreal isn't as cheap as it was a few months ago, but the stock still deserves to be on your radar for a buy-and-hold TFSA or RRSP portfolio. The dividend should continue to grow at a steady rate, and you'll be well-paid to wait for the next phase of the recovery. Continued volatility is expected, but the decline provides a good opportunity to add to the position.