On Wednesday, Northern Trust Corporation ( NTRS - Analyst Report ) increased its quarterly common stock dividend by 2 cents to 30 cents per share. The dividend will be paid on July 2, 2012 to shareholders of record as of June 8.

The strength of Northern Trust’s business model reflects the company’s commitment towards returning value to the shareholders with its strong cash generation capabilities. Prior to this revision, the company had increased its quarterly dividend to 28 cents per share in December 2007, an increase of 12%.

Northern Trust got the approval for its capital plan, which includes a hike in the quarterly dividend and the buyback of shares worth $240 million through March 2013. After receiving the regulatory nod, Northern Trust decided to hike dividend and board of directors approved a new common stock repurchase authorization of 10 million shares. The new share authorization program replaces the existing one.

Following the ongoing concerns in the banking sector, banks were asked to submit their respective capital plans to the Fed. It was intimated to these banks that payment of higher dividends will be restricted if they fail to meet the requirement of 5% ratio of core capital to risk-weighted assets among other requirements.

Moreover, the Fed's stress test was conducted to find out whether the banks have enough capital to survive another financial crisis, presuming 13% rise in unemployment rate, 50% fall in stock prices, 21% drop in housing prices along with economic downturn in Europe and Asia.

Other major banks which have come up with dividend hike after the approval of their capital plans include JPMorgan Chase & Co. ( JPM - Analyst Report ) , Wells Fargo & Company ( WFC - Analyst Report ) and U.S. Bancorp ( USB - Analyst Report ) .

Northern Trust has a strong capital deployment policy through regular share repurchase and payment of dividends. During 2011, the company repurchased 1.6 million shares for an aggregate cost of $79.4 million at an average price of $49.63 per share.

Moreover, it has paid common stock dividends amounting to $273.4 million to shareholders. Dividends and share repurchases together, Northern Trust’s total payout ratio was 58% in 2011.

We believe that the increase in dividend and approval of new share repurchase will boost investors’ confidence in the stock, thereby driving share value. Moreover, Northern Trust has $4.3 billion of cash and cash equivalents at 2011-end leaves ample scope for further capital deployment.

Shares of Northern Trust currently carry a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.