Secure Energy Services Inc. just wrapped up their Q1 2024 earnings call, and while analysts are buzzing about the upcoming substantial issuer bid (SIB) and the company's aggressive share buyback program, there's a quiet rumble beneath the surface that seems to have slipped everyone's radar: the potential for a significant dividend increase.

Let's face it, Secure Energy is swimming in cash. They've just finalized a $1.15 billion asset sale, they're practically debt-free, and their free cash flow generation is a thing of beauty. The company is clearly prioritizing returning capital to shareholders, but the current dividend, while offering a respectable 3.5% yield, might just be the calm before the storm.

During the call, incoming CEO Allen Gransch acknowledged the elephant in the room – the impact of share buybacks on the dividend. He stated that "as we buy back stock... There will be contemplation. Are we getting the value for the dividend and what do we want to do? Do we want to increase it?" This wasn't just a passing thought; it was a clear signal that a dividend review is on the horizon.

"Secure Energy is keenly aware of the "substantial disparity" between their intrinsic value and their current share price. They believe they deserve a higher multiple, and a dividend hike could be the catalyst to make that happen."

Think about it: a higher dividend increases shareholder yield, making the stock more attractive to income-focused investors. This could create upward pressure on the share price, pushing Secure Energy closer to the multiple they believe they deserve.

Share Buyback Impact

The following chart shows the potential impact of Secure Energy's share buyback program on its outstanding shares and dividend payout, assuming they allocate various amounts towards the SIB and growth spending. While hypothetical, it underscores their significant capacity for increasing dividend payouts.

But there's more to this story than just market perception. Secure Energy is committed to balancing its capital allocation priorities. They've outlined their growth spending plans, they're comfortable with their low leverage, and they're actively buying back shares. With all these boxes ticked, increasing the dividend becomes a natural next step.

Let's crunch some numbers. Secure Energy has narrowed their adjusted EBITDA guidance for 2024 to $450 million to $465 million. Assuming they hit the midpoint of that range, they'd be generating roughly $158 million in free cash flow after accounting for sustaining capital and abandonment/retirement obligations. Even if they allocate $100 million to the SIB and growth spending, that still leaves $58 million for additional shareholder returns.

Here's the kicker: at their current dividend rate, Secure Energy would only need $11 million to cover their payout. That means they have a massive $47 million surplus, representing a potential 427% increase to their current dividend!

Now, before you start dreaming of dividend checks big enough to buy a new car, it's important to remember that this is just a hypothetical scenario. Secure Energy might choose to allocate that surplus differently, perhaps towards further share buybacks or a larger SIB.

But the message is clear: Secure Energy has the firepower to significantly increase their dividend, and they're not afraid to use it. With a new CEO at the helm, a strong industry backdrop, and a laser focus on shareholder value, a dividend tsunami might just be on the horizon.

"Fun Fact: Did you know that Secure Energy's metal recycling business is booming? They're capitalizing on the growing demand for recycled materials, fueled by the shift towards electric arc furnaces in steel production. They're even investing in specialized rail cars to increase efficiency and throughput. This often-overlooked segment could be a silent powerhouse for Secure Energy in the years to come."