What impact will the buyback have on BMO's capital ratios, earnings per share outlook, and dividend policy over the next 12‑24 months?
Capital ratios:
The NCIB will retire roughly CAD 1.3 billion of common equity – about 1 % of BMO’s outstanding shares – over the next 12‑18 months. Because the repurchase is funded from retained earnings and not from additional debt, the CET1 ratio will dip marginally (≈ 10‑12 basis points) but will remain comfortably above the 12 % regulatory minimum. BMO still holds a CET1 of ~13.7 % and a leverage ratio above 5 %, so the modest reduction in capital is unlikely to trigger any supervisory constraints or affect its ability to meet future stress‑test requirements.
EPS outlook & dividend policy:
With ~1 % of shares removed, earnings per share should lift by roughly the same proportion, translating to an incremental CAD 0.20‑0.30 of diluted EPS for FY‑2026, assuming flat net income. BMO has historically targeted a 50‑55 % payout ratio. The buy‑back, combined with steady earnings growth (≈ 3‑4 % YoY in net interest income and a low‑volatility fee base), gives the board leeway to either keep the dividend unchanged or nudge it up by 2‑3 % to preserve the payout ratio. In the 12‑24‑month horizon, most analysts expect the dividend to stay at CAD 1.00 per share (or a modest quarterly increase to CAD 0.255) rather than a cut.
Trading implications:
Technically, BMO shares are testing the 200‑day moving average near CAD 105, with the 50‑day line providing a slight bullish bias. The buy‑back news adds a short‑term catalyst that should support the stock above its recent consolidation range, especially if the market interprets the modest CET1 dip as a “capital‑efficient” move rather than a weakness. For a risk‑adjusted play, consider a buy‑and‑hold or a bull‑put spread (e.g., sell a put at CAD 102 and buy a lower strike at CAD 97) to capture the expected EPS uplift and steady dividend while limiting downside to the capital‑ratio buffer. Watch for any forward‑looking guidance on earnings or dividend changes in the Q3 earnings release; a surprise upgrade would reinforce the bullish thesis, while a downgrade could expose the stock to a short‑term pull‑back.