Select Energy Services' $0.07 Dividend Signal: A Steady Hand in a Volatile Market

Select Energy Services (NYSE:WTTR) has quietly become a dividend darling in the energy infrastructure sector, recently raising its quarterly payout to $0.07 per share, marking a 16.7% increase from the prior quarter. This decision, embedded within a backdrop of strong financial performance and strategic investments, signals confidence in the company’s ability to sustain shareholder returns even as macroeconomic headwinds persist.

Dividend Growth: A Steady Climb

The $0.07 dividend, declared in November 2024 and maintained through early 2025, represents a significant milestone for WTTR. Since 2023, the company has steadily increased its payout, moving from $0.05 per share in early 2023 to $0.06 in late 2023, then to the current $0.07 (see dividend timeline below). The annualized yield now sits at 3.2%, a compelling figure in a sector where peers like Orion Engineered Carbons (ORI) and Element Solutions (YUM) offer negligible yields.

However, the dividend’s sustainability hinges on earnings. WTTR’s payout ratio of 97%—meaning nearly all earnings are distributed to shareholders—highlights a razor-thin margin for error. Investors must scrutinize whether the company’s cash flows can consistently cover these payouts.

The Financial Foundation: Revenue Growth and Margin Improvements

The dividend hike is underpinned by robust financial performance. In 2024, WTTR reported record annual revenue of $1.5 billion, a 26% year-over-year increase, driven by its Water Infrastructure segment. This division saw a 62% rise in gross profit year-over-year, fueled by strategic acquisitions, long-term contracts, and infrastructure expansions.

Key metrics in Q3 2024 further underscore the company’s strength:
- Net income rose 26% sequentially to $18.8 million.
- Adjusted EBITDA hit $72.8 million, up 4.6% from Q2.
- Free cash flow totaled $235 million for 2024, with $78 million generated in Q4 alone.

The Water Infrastructure segment’s 56.7% gross margin before D&A in Q3 (up over 5 percentage points sequentially) reflects operational efficiency gains, positioning the company to weather near-term challenges.

2025 Outlook: Growth Amid Short-Term Volatility

While Q4 2024 faces headwinds—including a projected 10–15% revenue decline due to seasonal factors and infrastructure downtime—the company expects a strong rebound in 2025. Critical catalysts include:
1. Water Infrastructure Expansion:
- A 15–25% annual revenue growth target for the segment, with the second half of 2025 projected to hit a 50% growth run rate as new projects (e.g., Permian Basin recycling facilities) come online.
- A $62 million investment in Colorado’s water markets, targeting long-term, high-margin contracts (e.g., 50-year agreements for municipal and agricultural use).

1. Margin Resilience:
2. Gross margins in Water Infrastructure are expected to stay robust, supported by 51–54% margins before D&A in Q4.

3. The Chemical Technologies segment is projected to improve margins to 14–16% in Q4, reversing a third-quarter decline.

4. Debt Management:

5. The net debt-to-EBITDA ratio has fallen “substantially below 1x” after securing a new $550 million credit facility, reducing refinancing risks.

Risks to Consider

• Short-Term Downturns: Q4 2024’s projected $60–62 million EBITDA is a dip from Q3’s $72.8 million, driven by infrastructure shutdowns and macroeconomic slowdowns.
• Colorado Venture: While promising long-term returns, the project’s lengthy payback period poses execution risk.
• Payout Ratio: The 97% payout ratio leaves little room for earnings misses, making profitability a critical watch point.

Conclusion: A Dividend Play with Upside, but Eyes on Execution

Select Energy Services’ $0.07 dividend is more than just a payout—it’s a testament to the company’s strategic execution in its core water infrastructure business. With $235 million in free cash flow and a 3.2% yield, the stock offers income investors an attractive entry point.

The 2025 outlook, while facing near-term dips, paints a bullish picture:
- Revenue growth of 15–25% in the Water Infrastructure segment.
- Adjusted EBITDA growth of over 20% year-over-year, driven by contracted projects and margin improvements.
- A dividend-supported shareholder return program totaling $38 million in 2024, with further hikes likely if earnings remain strong.

Investors should remain cautious of the high payout ratio and Q4’s volatility, but the long-term story is clear: WTTR is leveraging its infrastructure dominance to turn water management into a high-margin, dividend-fueling machine. For those willing to ride short-term bumps, the $0.07 dividend is just the beginning.