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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Valero Energy Corporation (NYSE:VLO) is about to trade ex-dividend in the next four days. Investors can purchase shares before the 17th of November in order to be eligible for this dividend, which will be paid on the 9th of December.
Valero Energy's next dividend payment will be US$0.98 per share, and in the last 12 months, the company paid a total of US$3.92 per share. Based on the last year's worth of payments, Valero Energy has a trailing yield of 7.9% on the current stock price of $49.79. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Valero Energy can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Valero Energy's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Valero Energy didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year, it paid out dividends equivalent to 230% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Valero Energy is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Valero Energy reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Valero Energy has increased its dividend at approximately 35% a year on average.
Is Valero Energy an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Valero Energy.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Valero Energy. Our analysis shows 3 warning signs for Valero Energy that we strongly recommend you have a look at before investing in the company.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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