A Bargain Up North?

Except for Nortel (NYSE: NT) and a couple of other Canadian companies, it's an unfortunate truth that we in the United States pay little attention to all of the fine companies based in Canada. Let's start to rectify that with a look at Bank of Montreal (NYSE: BMO), which reported its fourth-quarter and fiscal 2006 earnings yesterday.

For the year, Bank of Montreal reported an 11% increase in net income and earnings per share, on a revenue increase of 1.5% (5.9% if you don't include the sale of a business and weakening of the U.S. dollar). Considering that this year hasn't provided the kindest environment for banks -- largely because of the yield curve -- this is a good performance, though on most measures, the bank's performance declined sequentially from the third to fourth quarters. In fairness, the bank's results were partially hampered by its decision to invest in its U.S. operations for future growth and the aforementioned weakening of the U.S. dollar. As it stands now, the U.S. dollar should continue to weaken against its Canadian counterpart, remaining a drag on the company's results in the short term. However, deposit growth is solid and spreads should improve in the U.S.

Interest margin continues to get compressed at Bank of Montreal, as it has at many other banks this year. The net interest margin contracted seven points for the year, and eight for the quarter. This isn't huge, and Bank of Montreal is insulated from the decline by the many other fee-based products it offers customers. For the year, non-interest revenue made up 54% of the company's total revenue.

Bank of Montreal continues to repurchase its shares on a regular basis. This is primarily to offset the impact of its dividend reinvestment plan and dilution from stock options. I'm not a huge fan of such repurchase plans, particularly those purchases simply made to offset stock option dilution; I prefer more opportunistic buying. But the amount spent on repurchases is fairly small compared to the bank's earnings, and the bank has made opportunistic share repurchases in the past.

Carrying a market cap quite a bit smaller than Bank of Nova Scotia (NYSE: BNS), Toronto-Dominion Bank (NYSE: TD), and Royal Bank of Canada (NYSE: RY), Bank of Montreal is nonetheless a solid bank. Its ability to offer just about any financial service a customer might need gives it a strong competitive position. It is not, however, a high-growth business. But slow growth is just as good as fast growth if it comes at a fair price, and that's about where I'd assess Bank of Montreal, with a share price currently around $60 a stub.

I often like to pick up businesses after they've been beaten up for some spurious reason and fallen 20% or more. With Bank of Montreal, I don't expect such a large drop to happen. But a drop of even half that size makes the shares pretty interesting for a long-term investor, who can regularly reinvest the shares' meaty 3.6% yield.

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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.