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Readers hoping to buy Valero Energy Corporation (NYSE:VLO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Valero Energy's shares on or after the 4th of August will not receive the dividend, which will be paid on the 2nd of September.
The company'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 5.9% on the current stock price of $66.97. If you buy this business for its dividend, you should have an idea of whether Valero Energy's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Valero Energy reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out an unsustainably high 262% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Valero Energy was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Valero Energy has delivered 35% dividend growth per year on average over the past 10 years.
Remember, you can always get a snapshot of Valero Energy's financial health, by checking our visualisation of its financial health, here.
To Sum It Up
Has Valero Energy got what it takes to maintain its dividend payments? It's hard to get used to Valero Energy paying a dividend despite reporting a loss over the past year. Worse, 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.
With that being said, if you're still considering Valero Energy as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 3 warning signs for Valero Energy (1 makes us a bit uncomfortable!) that deserve your attention before investing in the shares.
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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