M&T Bank: A Lesson In 'Frozen' Dividends

| About: M&T Bank (MTB)


M&T’s dividend history provides an interesting case study.

Even when the dividend was frozen, longer-term results were still quite solid.

This article provides the reminder that a dividend freeze or cut can actually be an opportunity.

In previous commentary I highlighted when a dividend cut could actually be an opportunity. Usually during this time sentiment and expectations are rather low, creating a materially lower share price. If the company proves to remain profitable in the following years, the lowered payout leaves ample room for future recovery. It's bad news for current income investors, but the outlook for long-term owners isn't quite as clear-cut. Naturally a dividend cut isn't always an opportunity, but I would contend that this reason alone isn't strong enough to write off a potential investment completely.

The same basic logic applies with dividend freezes - the sibling of a dividend cut with a much better attitude. A lot of investors like to put these sorts of actions "on watch" or else avoid the security altogether. I'd like to walk through a demonstration of when a dividend freeze could have actually been an opportunity. I'll use M&T Bank (NYSE:MTB) for this example.

By the end of 2002, M&T was paying a $0.30 quarterly dividend. The company went on to pay this same mark for five quarters, before increasing it to $0.40 to start 2004. This payment also would be made for five straight quarters, before being raised to $0.45 in the middle of 2005. The $0.45 payout was made for four quarters until it was increased to $0.60 in the middle of 2006. This payment was made for five consecutive quarters and then boosted to $0.70 per share by late 2007.

So for those keeping track at home, that's the same payment and then an increase for 5, 5, 4 and 5 consecutive quarters from 2002 through 2007, respectively. Often dividend growth investors think about the annual "four quarters and raise" method, but it follows that there are some irregular patterns out there.

For the M&T Bank shareholder in the mid-2000s it would not have been uncommon to expect a raise every five quarters instead of every four. So when M&T announced its fifth straight $0.70 dividend in July of 2008 you probably would not have been alarmed.

What might have grabbed your attention is when the company announced its six straight $0.70 dividend in November of 2008, or its seventh straight payment in February of 2009, or its eighth consecutive $0.70 dividend in May of 2009, and so on. If you know the history of the security this next part won't surprise you, but it can be interesting if you're learning about it for the first time.

A lot of investors avoid the "frozen dividend" company because it can be a prelude to an eventual dividend cut. And given that M&T Bank was a financial company during the financial crisis, you might suspect that this was the company's eventual course. During this time, you had much larger firms like Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) all significantly reduce their payouts.

Yet this would not be the fate of M&T Bank. Today, March 31, 2016, M&T paid its 35th consecutive $0.70 quarterly dividend payment. Those who were waiting for a dividend cut are still waiting.

Now a couple of things strike me about this situation. First, the overall investment returns from 2002 through 2016 haven't been all that impressive. When times were good and the dividend was being increased, shares routinely traded between 15 and 20 times earnings. More recently shares have traded hands in the low-teens.

So even though the per share dividend is 130% higher and earnings-per-share are up 45%, the share price is "only" up 35% or thereabouts. When measured from the later part of 2002 to today, your total annualized gain would be around 4%. I'm struck by a very simple thought: when times are good, the valuation tends to reflect this. So even if the business improves it may have to fight the higher starting valuation.

The second thing that comes to mind is the psychology of the M&T Bank shareholder back in 2008. Naturally this would have been a very difficult time for any financial institution. The possibility of materially adverse results was very much alive, and certainly media coverage wouldn't have been doing anything to combat this sentiment. Yet it's helpful to keep in mind that this type of thing happens from time to time. Not in the same way, but there will be more recessions, more fears, lower stock prices, all of it in the future. The key is to bring rational thought to the table.

When M&T Bank declared its first $0.70 dividend payment, the share price was around $110. By the time the sixth straight $0.70 dividend payment was declared (the point in my view where a reasonable investor might tilt their head) the share price was down to $61. Same dividend, but a drastically different view of the company during that time. For a current or prospective shareholder, you had some options: hold, sell, buy more or ignore the security.

For a lot of investors, events like these trigger the "instant sell." Yet let's see what the other side of that coin looks like the person that bought those shares.

Some might consider this cherry picking, but people out there actually bought and sold at this price and it was far from the bottom. If you bought shares around $61 when the sixth straight $0.70 dividend was announced, you would have had to watch as bids went to all the way down to $29 in the next few months. It would have tested your investing psychology, but one thing that would not have been tested was your dividend income - that remained steady and still remains steady today.

Over the next seven years you would have gone on to collect nearly $25 in dividend payments. The share price now sits around $112, leading to a total value - prior to thinking about reinvestment - of about $137. Expressed differently, the investor that decided to buy instead of sell when the dividend freeze was known would have gone on to see annual gains on the magnitude of 12% per year.

Naturally this isn't going to work in every case, but I find this sort of information useful moving forward. It reminds you that a dividend freeze (or cut) might not be the worst thing in the world from a long-term total return standpoint. It can pay, quite literally, to reflect on whether or not the current situation could be an opportunity rather than instantly write it off as a short-term tragedy.

Disclosure: I am/we are long WFC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.