CAE Inc., the global training and simulation giant, recently held its Q4 2024 earnings call, and while analysts focused on the Defense segment's rebaselining and margin improvement, a crucial detail slipped through the cracks - a potential revival of shareholder dividends.

Sure, CAE's Defense performance has been a headache, with legacy contracts dragging down profitability. Marc Parent, CEO, acknowledged the frustration and outlined decisive actions to put these issues behind them. The appointment of Nick Leontidis as COO, the renegotiation of legacy contracts, and a focus on winning larger, more profitable programs all point towards a brighter future for Defense.

However, amidst the Defense drama, Sonya Branco, CFO, dropped a bombshell during the Q&A session. When asked about capital allocation, she emphasized a "balanced approach" that includes deleveraging, funding growth, and returning capital to shareholders. Notably, she revealed that the board is "actively evaluating options in terms of form, quantum, and timing" of shareholder returns.

This subtle statement signals a significant shift in CAE's stance on shareholder dividends, which were suspended in 2020 amidst the pandemic's chaos. The combination of a robust Civil segment, improved visibility in Defense, and a strengthened financial position, with leverage below 3 times net debt to adjusted EBITDA, creates a fertile ground for a dividend revival.

But what could this dividend look like? Let's delve into the numbers.

CAE generated a free cash flow of $418 million in FY2024, and with the divestiture of its Healthcare business, the company's financial flexibility is further enhanced. Assuming a conservative payout ratio of 30% of free cash flow, CAE could potentially distribute approximately $125 million in dividends.

With 318 million shares outstanding, this translates to a potential annual dividend of $0.39 per share, yielding an impressive 2% based on the current share price of $19.50.

Of course, the actual dividend amount will depend on the board's final decision. However, the language used by the CFO strongly suggests that a dividend reinstatement is a high probability, not merely a possibility.

Further supporting this hypothesis is the re-establishment of a Normal Course Issuer Bid (NCIB), designed to repurchase shares opportunistically. This move, coupled with the dividend evaluation, demonstrates CAE's commitment to rewarding shareholders.

Remember, CAE isn't just a defense contractor. They're also a key player in the booming Civil aviation training market. They've secured multi-year training agreements with major airlines like Qantas and Air France KLM, contributing to a record $6.4 billion Civil backlog. This consistent demand provides a stable base for generating cash flow and supporting shareholder returns.

Civil vs. Defense Segment Performance

The following chart illustrates the stark contrast in operating income between CAE's Civil and Defense segments, highlighting the need for improvement in Defense. Data is extracted from the provided earnings call transcript.

CAE Inc. Key Financial Data

This hidden signal in CAE's earnings call – the potential return of dividends – could be a game-changer for investors seeking both growth and income. While the Defense segment is undergoing a much-needed transformation, the robust Civil segment and strong financial position create a compelling case for a dividend revival, potentially offering a significant upside for shareholders.

"Fun Fact: CAE's simulators are so realistic that they're used not only by airlines but also by space agencies for astronaut training."