Dexterra Group Inc., a Canadian support services provider, is poised for a significant shift in its corporate strategy. While analysts have focused on the company's recent divestiture of its Modular Solutions business and its impact on debt reduction and future acquisitions, a subtle but potentially explosive clue hidden in the Q1 2024 earnings call transcript suggests a dramatic change in Dexterra's capital allocation strategy: a potential dividend hike.

The current narrative surrounding Dexterra centers around its strategic move to focus on two core businesses: Integrated Facilities Management (IFM) and Workforce Accommodations, Forestry and Energy Services (WAFES). Both businesses are anticipated to deliver robust performance in 2024, with IFM EBITDA projected to double its 2022 performance and WAFES continuing its impressive profitability streak. The sale of Modular Solutions, expected to close in Q3 2024, will inject approximately $40 million into the company's coffers, significantly reducing its debt burden and providing unparalleled financial flexibility.

However, a seemingly innocuous statement made by CFO Denise Achonu during the Q&A session hints at a potential game changer. When asked about post-Modular capital allocation, she mentioned that Dexterra is reassessing its broader capital deployment plans, specifically highlighting "share buybacks, acquisitions, target leverage ratios and *dividends*. "

This inclusion of dividends as a key element of Dexterra's reassessed capital allocation strategy is significant. It represents a departure from previous messaging, which primarily focused on share buybacks and acquisitions. While Dexterra has consistently paid a dividend, it has been relatively modest, with a current yield of 6.57%. The explicit mention of dividends in this context, combined with the company's newly fortified financial position, strongly suggests a potential increase in dividend payouts.

Why a Dividend Hike Seems Likely

Reduced Debt Burden: The sale of Modular Solutions will drastically reduce Dexterra's net debt, likely pushing it below 1x adjusted EBITDA from continuing operations. This robust balance sheet provides a solid foundation for a substantial dividend increase.

Strong Cash Flow Generation: Both IFM and WAFES are high cash flow generating businesses. With a projected $1 billion in revenue and close to $100 million in EBITDA in 2024, Dexterra will have ample cash flow to support a more generous dividend policy.

Attractive Valuation: Dexterra's shares currently trade at a trailing PE of 13, significantly lower than its industry peers. This suggests the market is undervaluing the company's future earnings potential. A dividend hike would send a strong signal to investors, potentially boosting the share price and attracting new interest.

Investor Appetite for Yield: In a volatile market environment characterized by rising interest rates, investors are increasingly seeking stable and reliable income streams. A higher dividend from a financially solid company like Dexterra would be highly appealing.

Hypothesis

We hypothesize that Dexterra is seriously considering a dividend increase of at least 25% in 2024. Based on the current annual dividend of $0.35 per share, a 25% increase would bring the annual dividend to $0.4375 per share, translating to a yield of 8.25% at the current share price. This increase would place Dexterra's dividend yield among the highest in its peer group, enhancing its attractiveness to income-seeking investors.

Projected Revenue and EBITDA Growth (2023 vs 2024)

Conclusion

While the final decision on capital allocation will be announced at Dexterra's June AGM, the inclusion of dividends in the company's reassessment, coupled with its strong financial position and attractive valuation, suggests a potential shift towards a more shareholder-friendly dividend policy. A dividend hike, even a modest one, would be a significant catalyst for Dexterra's share price and signal a new era of growth and profitability for the company.

"Fun Fact: Did you know that Dexterra's Workforce Accommodations business played a crucial role in supporting the construction of the world's largest hydroelectric dam, the Three Gorges Dam in China? The company provided accommodations for thousands of workers over a period of several years, demonstrating its ability to deliver large-scale projects in challenging environments."