Bank of Montreal 1997 Annual Report Download - page 27

Over the past five years, shareholders have received a 26.1%
return on their investment in Bank of Montreal. This return
exceeded the market return (TSE 300) of 18.1% over the
same period. Our returns were driven by a combination of
a 158% appreciation in share price since the beginning of 1993, and a $0.49 increase in
annual dividends paid on common shares.
In 1997, shareholders earned a 55.0% return on their investment in Bank of Montreal,
which exceeded the market return (TSE) of 24.4% by 3060 basis points. Return on invest-
ment in 1997 was driven by our strong performance, higher valuations given to Canadian
banks in general and a robust North American economy.
Strategy:
To maximize shareholder value
through consistent earnings per
share growth, profitability and
responsible capital management.
In summary, our strategy is to earn,
grow and invest all at the same
time; to advance management
sciences; and to diversify lines
of business.
Measures:
We analyze two principal measures
to determine success in providing
superior shareholder value:
•
Five-year return on common
shareholders’ investment (five-
year ROI), the primary measure,
is an indicator of long-term suc-
cess in driving shareholder value;
•Annual return on common share-
holders’ investment (ROI) is a
measure to analyze shareholder
value in the short term.
In both measurements, ROI is
calculated as the annualized total
return earned on an investment
in Bank of Montreal common shares
made at the beginning of each
period. Total return includes
the effect of the change in share
price and the reinvestment of
received dividends in additional
Bank of Montreal common shares.
Five-Year Annualized Return on Investment
Reaches 26.1%
Return on common shareholders’ investment is the most
important of our ten primary measures. We believe that if
we can consistently deliver an above-average level of
value
to shareholders, then both shareholders and manage
ment
will achieve success.
S&P500TSE 300 IndexBMO
26.1
19.8
18.1
Five-Year Return on
Investment
(%)
9796959493
26.88
29.75
25.13
40.55
60.85
BMO Closing Price Per
Common Share
($)
Shareholder Value
Return on Common Shareholders’ Investment
For the year ended October 31 1997 1996 1995 1994 1993
Closing market price
per common share ($) 60.85 40.55 29.75 25.13 26.88
Dividends paid ($ per share) 1.60 1.41 1.29 1.18 1.11
Dividend yield (%) (a) 3.9 4.7 5.1 4.4 4.7
Five-year ROI (%) 26.1 22.2 23.1 14.3 20.6
ROI (%) 55.0 42.4 24.1 (2.3) 19.4
(a) Dividends paid in the year divided by the opening stock price.
Note: For more information see Table 1 on page 52.
Bank of Montreal to Adopt Economic Measure of
Contribution to Overall Shareholder Value
In order to focus business units on enhancing overall shareholder value,
we will be adopting a new measure of contribution during the 1998
fiscal year – Net Economic Profit (NEP). Economic profit will be reported
income less preferred dividends or net income available for common
shareholders, adjusted for a number of items to more accurately reflect
the economic or cash contribution by a unit on an ongoing basis. Adjust-
ments include those related to accounting for business acquisitions,
loan losses on an “expected” loss basis, and exclusion of any non-
recurring and unusual items. A charge for the cost of common
equity
capital is then deducted to arrive at NEP.
Thebenefitofthismeasureisthatitfocusesnotonlyonthecash
income contributed by a unit but also on the capital resources applied
to deriving that income. Business units will be allocated capital relative
to the economic risks they undertake; the nature of these risks include
credit, position and other forms of business risk. The rate to be applied to
capital to determine the charge will be equal to the economic performance
threshold rate (as described on page 23), labelled cost of equity below.
Increasing NEP will normally enhance shareholder value, and business
units will be given NEP growth targets commensurate with their indi-
vidual lines of business and market positions. NEP will also be used as
the basis for resource allocation and investment decisions.
Bank of Montreal 180th Annual Report 1997 21
Historical Net Economic Profit
For the year ended October 31 1997 1996 1995 1994 1993
Cost of equity (%) 12.0 12.0 12.0 13.0 12.5
Net economic profit ($ millions) 433 398 297 177 107
For the above, expected losses are assumed to equal the reported loan loss provision each year.
Total return to shareholders
is measured by the change in
market capitalization plus
the dividends (dividends paid,
not reinvested) over a specified
period of time. Over the past
eight years, our return to share-
holders was $14.6 billion which
is comprised of $12.1 billion in
increased market capitalization
and $2.5 billion in increased
dividends.
9796959493929190
(0.4) 1.2 2.8 4.0 4.2 5.8
8.8
14.6
BMO
Total Return to Shareholders
($ billions)