Provident Financial Services (PFS), the steady-as-a-rock regional bank nestled in the heart of Jersey City, recently released its first quarter results for 2024. On the surface, it was a quiet quarter. Revenue was down slightly, earnings were in line with expectations, and the company continued its long tradition of consistent dividend payouts. Analysts, including the ever-bullish Mark Fitzgibbon of Piper Sandler, largely yawned.

But beneath the placid surface, something extraordinary is happening. A careful examination of PFS's financial data reveals a subtle shift, a whisper in the numbers that could herald a dramatic increase in dividend payouts in the coming years. This signal, overlooked by the broader market, lies in the dynamic interplay between the company's net debt, net invested capital, and free cash flow.

Historically, PFS has maintained a conservative financial profile, preferring a low debt burden and a steady accumulation of invested capital. This strategy, while prudent, has capped the amount of cash available for distribution to shareholders. However, the first quarter of 2024 shows a distinct change in this pattern.

PFS's net debt, which stood at a healthy -$23.2 million in the first quarter of 2022, has progressively increased over the past year. While still manageable at $1.97 billion in the most recent quarter, this trend suggests a growing appetite for leveraging the balance sheet to drive growth. Simultaneously, the company's net invested capital has plateaued, hovering around the $3 billion mark for the past two years. This combination—increasing debt and stable invested capital—is intriguing.

Why the Shift? The Free Cash Flow Explosion

Why would PFS deviate from its conservative playbook and embrace higher debt levels? The answer may lie in the explosive growth of its free cash flow. In 2022, PFS generated $190.9 million in free cash flow. This figure, already impressive, is projected to balloon to a staggering $420.3 million by the end of 2024, representing a 120% increase in just two years.

This dramatic surge in free cash flow, coupled with the company's willingness to take on more debt, points to a fundamental shift in PFS's strategic direction. The company appears to be entering a phase of aggressive growth, leveraging its strong balance sheet and abundant cash generation to pursue new opportunities.

The Dividend Tsunami Hypothesis

Now, here's where things get interesting for dividend investors. With its traditional avenues for capital deployment—net invested capital—largely exhausted, PFS will soon face a delightful dilemma: what to do with the mounting pile of free cash? The answer, we hypothesize, is a significant increase in dividend payouts.

While PFS's current dividend yield of 7.11% is already generous, imagine the possibilities if the company chooses to distribute even a portion of its projected free cash flow growth to shareholders. A 50% payout ratio, for example, could result in a dividend yield north of 12%, making PFS a veritable dividend powerhouse.

"Potential Dividend Scenarios Current Payout Ratio: 7.11% yield 50% Payout Ratio: Could exceed 12% yield"

Of course, this is just a hypothesis, and several factors could influence PFS's future dividend policy. The company may choose to reinvest its free cash flow in acquisitions, buy back shares, or simply maintain its current payout ratio. However, the dramatic growth in free cash flow, combined with the shift towards higher debt levels, suggests that a dividend increase of some magnitude is highly likely.

"Fun Fact Provident Financial Services' history dates back to 1839, making it older than the state of New Jersey itself! Just like the state, PFS has weathered many storms and emerged stronger, building a reputation for stability and resilience that continues to attract investors today."

Conclusion: The Calm Before the Storm?

This overlooked signal in PFS's quiet quarter presents a compelling opportunity for savvy investors. While the market may be focused on the short-term fluctuations of revenue and earnings, the true story lies in the long-term trajectory of free cash flow and its potential impact on dividend payouts. The quiet quarter may just be the calm before a dividend tsunami.