Valero: Growing Free Cash Flow To Support Dividend Growth

Overview - Valero has provided a total return of slightly over 21% since August of the previous year, remaining on par with the S&P 500 [2] - The company is revisiting its valuation and outlook, aiming for a more conservative estimate of fair value [2] Company Profile - Valero is an energy company that refines and sells petroleum and petrochemical products globally, operating in three main segments: Refining, Renewable Diesel, and Ethanol [4] - The company is strategically positioned to benefit from the Biofuels market, which is expected to grow at a CAGR of 5.2% through 2029 [4][5] Dividend Analysis - The latest quarterly dividend is $1.07 per share, resulting in a current dividend yield of 2.7% [6] - The dividend payout ratio is low at around 20%, significantly below the sector median of approximately 40% [6] - The dividend has grown at a CAGR of 4.2% over the past five years and 15.97% over the past ten years [6][7] - A back test shows that an initial investment of $10,000 in 2015, with monthly contributions and reinvested dividends, could yield an annual dividend of $4,873 by 2023 [7] Valuation Insights - Valero currently trades at a price-to-earnings ratio of 7.63x, below the sector median of 10.38x and its own five-year average of 8.95x [8] - The average price target from Wall Street analysts is around $180.95 per share, indicating a potential upside of approximately 17% from current levels [9] - A dividend discount calculation estimates a fair value of $171.20 per share, representing an 11.5% upside based on a conservative growth rate of 7.5% [20] Financial Performance - In Q1, Valero reported a revenue decrease of 12.8% year-over-year, totaling $31.76 billion, while earnings per share beat expectations at $3.82 [22] - The refining segment saw a significant drop in operating income from $4.1 billion to $1.7 billion due to lower refining volumes and maintenance costs [22] - The Renewable Diesel segment's net operating income decreased to $190 million, despite an increase in sales volume to 3.7 million gallons per day [22] - The Ethanol segment's operating income was $10 million, with production averaging 4.5 million gallons per day [23] - Cash from operations and free cash flow have improved above pre-pandemic levels, with liquidity strong at $4.9 billion [23] Debt and Cash Flow - Valero's long-term debt totals approximately $10 billion, which is within a normal range of $8 billion to $12 billion [27] - Free cash flow is currently at $7 billion, slightly down from $9.6 billion at the end of 2023 [27] Conclusion - Valero is positioned as a strong dividend compounder with rising free cash flow and a healthy payout ratio, supporting potential dividend growth [32] - Despite recent decreases in business segments, the company remains sensitive to crude oil price fluctuations, which can impact profitability [32]