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. You will need to purchase shares before the 3rd of August to receive the dividend, which will be paid on the 2nd of September.
Valero Energy's next dividend payment will be US$0.98 per share. Last year, in total, the company distributed US$3.92 to shareholders. Looking at the last 12 months of distributions, Valero Energy has a trailing yield of approximately 6.6% on its current stock price of $59.69. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Valero Energy has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Valero Energy paid out a disturbingly high 358% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Valero Energy generated enough free cash flow to afford its dividend. Dividends consumed 59% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Valero Energy fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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's earnings per share have plummeted approximately 32% a year over the previous five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Valero Energy has delivered 21% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Valero Energy is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Is Valero Energy an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. What's more, Valero Energy is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think Valero Energy is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Although, if you're still interested in Valero Energy and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 4 warning signs for Valero Energy (1 is significant!) that you ought to be aware of before buying 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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