Valero Energy Stock: High dividends backed by a rock-solid balance sheet (NYSE: VLO)


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Investment thesis

Valero Energy (NYSE: VLO) is a manufacturer and distributor of liquid transportation fuels. About 80% of its adjusted operating profits come from its refining business unit. Therefore, its refining operations are the driving force behind the thesis.

Even if Valero tracks oil oil price, it earns its money on the spread between oil prices and the margin on refined petroleum products (such as gasoline, diesel, jet fuel and petrochemicals).

Before investors get too enthusiastic, they should keep an eye on electricity and natural gas prices, as these input costs could hamper Valero’s ability to report strong earnings.

That being said, even with higher energy prices around the world, Valero’s geographic locations make it a low-cost operator.

Therefore, with gasoline and diesel demand likely to remain high in 2022, this bodes very well for shareholders.

Meanwhile, shareholders are also getting an attractive dividend yield of 3.9% while participating in Valero’s future upside.

For dividend seekers, this is an excellent choice.

Valero’s revenue growth rates will come in very strongly in the first quarter, with a but

Valero revenue growth rate

Valero revenue growth rate

As you can see above, for the first quarter of last year, Valero’s revenue growth rates were negative 5%. Common sense immediately tells you that in the current pricing environment, relative to this quarterly comparison, the first quarter of 2022 will show very high revenue growth rates.

That being said, the uncertainty here is what does the outlook look like further into 2022?

Valero Consensus Income

Valero Consensus Income

As you can see above, it is currently expected that after exiting the first quarter of 2022 and moving forward into 2022, it is assumed that Valero’s revenue growth rates will compress to mid-digits.

However, this is a consensus estimate that I believe is overdue for an upgrade. Why? Because the demand for Valero’s product is very strong right now.

Why Valero Energy? Why now?

Valero Energy Overview

Valero Investor Presentation

Valero is an international manufacturer of petroleum-based products. It includes refining, renewable diesel and ethanol business units. That said, for the fourth quarter of 2021, around 80% of its operating income came from its Refining segment. Therefore, the real opportunity here is its Refining business.

Valero Refining operating profit Q4 2021

Valero Q4 2021 results

In the fourth quarter of 2021, Valero’s refining adjusted operating income grew from minus $0.5 billion to over $1.1 billion. What a transition to make in 12 months.

Additionally, during its Q4 2021 earnings call, Valero asserted that refining margins will remain high in the near term.

However, the duration of these high margins is uncertain. However, for shareholders, fortunately, the thesis here does not only focus on predicting the differential between sour crude oil and Brent crude oil.

The bullish thesis in one image

Valero dividend yield

Valero Investor Presentation

The chart above shows the opportunity for investors.

You have a large-cap company, which has a long history of delivering high returns on invested capital while leveraging its balance sheet as an investment grade, while delivering double-digit shareholder returns CAGR.

This makes Valero a very ‘safe’ investment opportunity. We’re talking about a blue chip company that pays a dividend yield of 3.9% at current prices.

For investors looking for something slightly more defensive as stock prices of tech companies continue to implode lower, I believe Valero presents investors with a very good opportunity for satisfying returns going forward.

VLO Stock Valuation – Cheap Price

Next, let’s talk about Valero’s balance sheet. Valero carries approximately $12 billion in total debt and obligations under finance leases. However, as you can see below, he’s also carrying just over $4 billion in cash.

Valero balance sheet

Valero Investor Presentation

When we consider that its net debt position is approximately $8 billion, along with its available and revolving credit facility, it’s easy to see how high-quality Valero’s balance sheet is:

Valero Reviews

Valero 10-K

In short, for investors who want to be sure that their company will provide them with a sustainable, headache-free, growing and rich dividend yield, I believe that Valero fits this profile perfectly.

The essential

Return of Valero shareholders

Valero Investor Presentation

As you can see above, Valero is committed to a high return on earnings of around 40% to 50%. It’s not the kind of company that is bent on growing its asset base just for the sake of it.

The one-liner is this: if you think demand for petroleum products is going to stay high and you want a safe and high dividend, then you better consider Valero.


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