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A Perspective on Dividend Policy Changes

|Includes: Northern Trust Corporation (NTRS), TRH, WSC
A Reader Asks:

In reading "lessons learned from our worse picks", the key 'lesson' was 'not adhering to our rules', mainly "one rule is to side-step stocks that have had recent cuts or no annual increase in the dividend."

Yet, Northern [Trust] has had no increases in 3 years (so even before the crash).

I realize that one should not be totally dogmatic in an investment approach. Perhaps a large % of the "good" picks also showed similar dividend lags...but then why would it be "a rule"?

Our Response:

Thanks for the great observation. This site tracks current and former Dividend Achievers. This means that stocks that had a history of dividend increases will likely be included in our investment decisions at some point in the future, even if they don’t have a current history of dividend increases. We track companies that did have a history of dividend increases because cutting the dividend may have been done for strategic purposes.

One matter about the article titled “Lessons Learned From Our Worst Picks” is that we probably didn’t put enough emphasis on how recent a dividend policy has changed. We don’t mind if there isn’t an increase nor does it matter that there is a cut. What matters most is how recent such action took place and for what reason.

In the article mentioned above, we did say the following about cuts that occurred in stocks that we selected:

What we should have done is wait one full year after the cut, or lack of an increase, to determine the viability of the company. Keep in mind that a cut in the dividend isn’t a death sentence. In fact, cutting the dividend might be the best management move to make. However, current shareholders of the company might abandon the stock if they have a policy to hold stocks with a steady dividend (as we advise investors to do.)
Northern Trust (NASDAQ:NTRS) happens to be the perfect example of our investment approach in action. Based on the history of dividend increases, Northern Trust was expected to increase the dividend on December 8, 2008. However, the economic environment, as uncertain as it was, did not warrant such actions from the board. The most prudent action was to conserve as much cash as possible.

It is interesting to note that according to Value Line Investment Survey, Northern Trust earned $3.24 per share in 2007 and $3.47 in 2008. Although the cash was available, NTRS made a prudent and accurate decision to maintain, rather than increase the dividend since 2009 earnings came in at $3.16. Despite a drop in earnings in 2009 and the economic turmoil of 2007 to 2009, the book value of NTRS has climbed from $20.44 in 2007 to $26.50 in 2009. A decision on the dividend that was made in 2008 anticipated the decrease in earnings in 2009 is what we should expect for a “well” run organization.

The management at Northern Trust (NTRS) continues to demonstrate a high level of competency that rewards the shareholders and account holders equally. First, by not overreaching as the bubble grew, NTRS avoided jeopardizing the well being of their clients. Second, by taking appropriate actions in response to the “crisis” that swirled around them by not increasing the dividend in order to conserve cash, NTRS positioned themselves to fight another day; which ultimately benefits the shareholders.

Historically, we have been reticent to make any recommendations of companies in the financial services industry, especially banks. However, the last three recommendations of Transatlantic Holdings (NYSE:TRH), Wesco Financial (NYSEMKT:WSC) and Northern Trust (NTRS) have demonstrated an exceptional ability to weather the most recent storm. 

These characteristics, not increasing or cutting the dividend before a crash, were demonstrated by some of the best corporations with similar dividend increasing histories before the crash of 1929.  The rationale given by some corporate leaders at the time were astounding in their prescience.  This explains why we wouldn't rule out a company that has embarked on a new dividend policy.

Disclosure: Long TRH

Disclosure: Long TRH