Time for Valero to Rethink its Dividend Strategy (VLO)

Valero Energy Corp. (NYSE: VLO) has just recently announced its routine $0.05 dividend per common share per quarter.  This $0.20 comes to a yield of only about 0.7% for investors.  Oil investors have generally dealt with lower payouts than other sectors offer via dividends, but the time for Valero to increase its payout is probably getting nearer.

For starters, Valero used to have a $0.15 per share per quarter dividend, but that was lowered after the last $0.15 payout was made in late-2009.  Valero raised its $0.12 dividend to $0.15 in early 2008, and that is when its operating margins were surfacing as it turned out that refining companies were magically unable to pass on the higher costs of making gasoline and other oil derivatives despite the notion that oil was on a runaway rally.

When Valero cut its dividend it had little choice.  The company had to conserve capital until the market came back for refining operations.  The current market may have moved a bit too fast in the last two months for a refining operation to remain in the sweet spot as much as it had been for the previous six months.

When the first $0.05 dividend was paid on February 12, 2010, Valero stock was trading at $17.53.  When its November 6, 2009 dividend of $0.15 was paid out, Valero shares were at $17.07, but the shares had been $20.00 at the end of October 2009.  Valero’s stock sits north of $28.00 today.  The yield was still above 1.1% after the payout was cut and it was above 3% when it was cut.

Is it fair to ask Valero to increase its payout back to $0.15 per quarter per common share?  Probably not, and we would not expect a payout of that sort.  Not yet, and not when oil prices are moving all over.  We do still anticipate a jump, probably later this year.  A 1% yield would require a payout of $0.07 per quarter based upon today’s share prices.

Thomson Reuters has estimates of $3.24 EPS in 2011 and $3.63 EPS in 2012.  Where those earnings will ultimately come in at depends upon too many moving parts for us to just assume that the analysts will be right on.  Valero has a mixed earnings history, and we can recall just how brutal the environment had been for refiners just a year to two years ago.  Its earnings from operations came in at only $0.18 this week so we cannot expect any massive jump until the earnings normalize again, and its quarter-end debt was $7.829 billion against $4.133 billion in cash and short-term investments.

We are just now on the backside of the dividend announcement and right after the 2011 annual shareholder meeting.  Maybe it will take a bit longer, but Valero is probably closer to lifting its dividend than many investors might think. 

JON C. OGG