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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

One Investment Could Save Two Generations' Retirements

Personal_Finance / Pensions & Retirement May 22, 2015 - 12:29 PM GMT

By: ...

Personal_Finance

MoneyMorning.com Peter Krauth writes: The goal of a comfortable retirement is getting more challenging by the day.

That's overwhelmingly thanks to the Fed's Zero Interest Rate Policy (ZIRP).

A recent poll reveals Generation Xers, the next wave of retirees to follow the Baby Boomers, expect to be a whole lot more self-sufficient.


With Social Security considered bankrupt by many accounts, it's little wonder.

That leaves investors increasingly reliant on themselves to build their own retirement nest eggs to generate income.

And this investment does the job – and more…

The Most Powerful Motivator

In a twisted way, it seems something good did eventually come out of the Financial Crisis: fear.

And now there's proof.

A recent poll by PNC Financial Services reveals that the next wave of retirees aims to be decidedly more self-reliant when it comes to preparation and savings.

Additionally, 65% of Gen Xers (aged 35-49) but just 45% of Boomers (aged 50-68) responded "I believe am am solely responsible for my retirement (no Social Security, employer pension, inheritance, etc.)."

That's a sea change – one that's necessary – and it has now translated into action.

Here's what I mean…

Amongst the Gen Xers, they've become concerned enough that more than half are now saving more for retirement than they did before the Great Recession.

Today, it's reached the point where more Gen Xers are socking away more to retire on than Baby Boomers, with 51% of Gen Xers increasing savings, compared with just 37% of Boomers taking that path.

But the search for relative safety, good capital gains prospects, and a rock-solid yield has gotten more challenging than ever.

The Fed Is Driving This Crisis

As we talked about back in April, the Fed's Zero Interest Rate Policy (ZIRP) is killing retirement yields. ZIRP, instead of helping individuals, is meant to help the Treasury meet interest payments on trillions worth of Federal debt.

According to Bridgewater Associates, 85% of public pensions could well blow up within 30 years – right about the time the youngest Gen Xers are due to retire – with obligations of $10 trillion vs. $3 trillion currently in assets.
Actuaries responsible for Social Security forecast the fund will run drier by 2033 than California's current water supply. That's only 18 years away. And meanwhile, researchers at Ivy League institutions Harvard and Dartmouth consider even that estimate to be too optimistic.

Boston University's Laurence Kotlikoff thinks Social Security's accounting should be likened to that of Enron, with $24.9 trillion in unfunded liabilities out to 2088.

The need to save more, and have those savings return more, is now as crucial as ever.

So where should you turn to meet those needs?

Love 'em or hate 'em, banks are notoriously profitable.

So… why not join 'em?

All you need is to look a little to the north.

A Canadian Institution with a Continental Focus

Bank of Montreal (USA) (NYSE: BMO) is Canada's oldest bank. Established in 1817, it has existed for nearly two centuries.

Over that time, it has consistently grown to become a $41 billion banker, lender, asset manager, and financier, boasting over 12 million customers.

Today, BMO is the fourth-largest of Canada's Big Five banks according to its market cap and assets. BMO Financial Group also ranks in the top ten largest banks in North America.

With total assets of $589 billion and over 46,000 employees, BMO is diversified across the financial sector, with its operations organized along three segments: personal and commercial (P&C) banking in Canada and the United States, wealth management, and capital markets.

Let's look at each of these in more detail…

Personal and commercial banking is pretty much what you'd expect: Taking customer deposits, handling checking accounts, and establishing personal and business loans. In Canada, BMO offers a full suite of products and services to 7 million customers.

It's not immediately obvious, but BMO actually has a significant U.S. presence. Back in 1984, the company bought Harris Bank, which has since been renamed BMO Harris Bank. Its most significant acquisitions since then have taken place in just the last six years.

In 2010, BMO paid C$4.1 billion to acquire Marshall & Ilsley Corp., originally established in 1847. M&I Bank and Harris together make up the BMO Harris Bank since 2011. The M&I acquisition was complementary and helped BMO strengthen its North American operations.

In the United States, BMO's base is Chicago with over 600 branches and some 1,300 ATMs in Illinois, Wisconsin, Indiana, Kansas, Missouri, Minnesota, Arizona, and Florida.

Wealth Management serves all segments from mainstream to ultra-high net worth and institutional, offering a wide range of management and insurance products. This segment operates in Canada, the U.S., Asia, and Europe.

In 2014 BMO acquired F&C Asset Management for C$1.3 billion. That boosted BMO's significance as a global money manager, providing enhanced servicing capabilities and widening its reach into the U.K. and the rest of European wealth markets.

BMO Capital Markets offers a full range of products and services for corporate and governmental clients. The division boasts 30 locations globally, with 16 in North America, providing equity and debt underwriting, corporate lending and project financing, mergers and acquisitions advisory services, merchant banking, securitization, treasury and market risk management, foreign exchange, derivatives, debt and equity research and institutional sales and trading.

Bank of Montreal has consistently grown revenue and net income. Its trailing P/E is the lowest of its closest competitors, and its forward P/E is just 8.9, pointing to considerably strong forecasted revenues for the full year (ending Oct. 2016). BMO's operating margin is 33%, its profit margin is a hefty 26%, and return on equity is 12%.

Right now shares are about $64 each. I suggest you use a 25% trailing stop, and a hard stop on a closing basis of $57.48, the low it touched in late January.

As for dividends, BMO Financial Group is the longest-running dividend-paying company in Canada, with a policy of paying out 40% to 50% of earnings in the form of dividends. BMO has not missed a dividend payment since 1829, making it one of the longest dividend histories in the world.

And that means a juicy 4.1% yield for current investors. That sounds like a great way to earn income and grow a retirement nest egg.

Source :http://moneymorning.com/2015/05/22/one-investment-could-save-two-generations-retirements/

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


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