Tuesday’s TSX breakouts: A dividend hike is anticipated for this bank stock

The S&P/TSX composite index is less than 100 points away from hitting the 14,000 level, where the index stood back in August 2015, before the summer market meltdown.

The number of stocks on the positive breakouts list (stocks with positive price momentum) is subdued at 27 names. Meanwhile, there are just six stocks on the negative breakouts list (stocks with negative price momentum).

An increase in the number of positive breakouts would be positive, suggesting the positive price momentum in the TSX index is being driven by a large number of companies instead of a small, concentrated list.

This week marks the beginning of the earnings parade by the Canadian "Big 6" banks.

On Wednesday, the Bank of Montreal kicks it off the second quarter reporting earnings before the market opens. The following day, the Royal Bank, CIBC, and TD Bank will all be reporting before the market opens. Scotiabank reports the following week at the end of the month, and National Bank rounds out the earnings parade, reporting June 1.

Discussed today is the Bank of Montreal (BMO-T), a stock that appears on the positive breakouts list with its share price gaining strength as the reporting date approaches.

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

The Bank of Montreal is the 8th largest bank in North America as measured by assets. As of the end of the first-quarter, BMO had total assets of $699-billion. In terms of geographical breakdown, as of January 31, 71 per cent of adjusted net income over the last 12 months was from Canada, 23 per cent stemmed from the U.S., and a small balance came from other regions.

Before the market opened on Feb. 23, the company reported better-than-expected earnings. Adjusted earnings per share (EPS) came in at $1.75, compared to the Street's expectations of $1.72. Adjusted return on equity fell to 12.1 per cent from 12.3 per cent last year. The Common Equity Tier 1 ratio fell to 10.1 per cent, down from 10.7 per cent last quarter but was unchanged from a year ago. The book value per share was $59.61. The stock price was little changed that day, declining 16 cents.

Dividend policy

Based on history, shareholders may expect a dividend increase of 2 cents per share will be announced on May 24. The company has announced a hike in its dividend by 2 cents per share in May of each year since 2014.

The company currently pays shareholders a quarterly dividend of 84 cents per share, or $3.36 on a yearly basis. This equates to an annualized yield of 4.1 per cent.

Management targets a payout ratio of between 40 per cent and 50 per cent.

Valuation

The stock appears fairly valued. According to Bloomberg, on a price-to-earnings (P/E) basis, the stock is trading at a multiple of 11.7 times the 2016 consensus estimate, above the three-year historical average of 11.3 times.

Looking forward to next year, the stock is trading at a P/E multiple of 11.2 times the 2017 consensus earnings estimate, which is above its three-year historical average of 10.7 times. During the past three years, the peak valuation was just over 12 times.

Analysts' recommendations

According to Bloomberg, the one year price target is $80.98, suggesting the shares are fully valued. There are three buy recommendations, 13 hold recommendations, and two sell recommendations. Price targets range from a low of $73 to a high of $93.

The consensus EPS estimate is $7.07 in 2016, rising 4.5 per cent to $7.39 in 2017.

Chart watch

The stock price is in an uptrend. In terms of year-to-date performance, BMO shares are right in the middle of the pack. The leader of the "Big 6" banks is Scotiabank with its share price up 12.7 per cent year-to-date, CIBC's stock price is up 11.2 per cent, followed by shares of the Bank of Montreal, which are up 5.9 per cent year to date. The financial sector in the TSX index is up 4.5 per cent.

Shares of BMO are approaching overhead resistance at $85. The stock price previously peaked at $85.42 back in September 2014.

There is downside support around $80, near its 50-day moving average (at $80.27), then around $75, just below its 200-day moving average (at $75.75). Failing that, there is support around $70.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of securities principally from the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Securities on the positive breakouts list have displayed positive price momentum during this period. Securities on negative breakouts list have experienced negative price momentum.