Is Valero Energy's Dividend Growth Rate Sustainable???

Valero Energy Corporation operates as an independent petroleum refining and ethanol producing company in the United States, Canada, the United Kingdom, Ireland, and internationally. Last month, I talked about Valero beating earnings and how the stock breakout.

In that same post, I also talked about the crack spread. The crack spread is the one parameter that determines a refiner’s earnings. The crack spread entails the cost of the raw material input, oil and what the finished product, gasoline, diesel, and jet fuel can be sold for.

Since there are 42 gallons of oil in a barrel, you can multiply this ratio by 42 to get the actual profit margin per unit. At today’s ratio of .0295, multiplying by 42 gives us 1.24. That means a profit margin of 24% for every gallon of crude oil refined into gasoline.

Valero Energy Finally Breaks Out

And it’s this crack spread that holds the key to Valero having one of largest sustainable dividend growth rates that I have ever seen.

During the past 12 months, Valero Energy's average dividends per share growth rate was 12.90% per year. during the past 3 years, the average dividends per share growth rate was 23.50% per year. During the past 5 years, the average dividends per share growth rate was 32.80% per year. During the past 10 years, the average dividends per share growth rate was 26.90% per year. During the past 13 years, the highest 3-Year average dividends per share growth rate of Valero Energy was 62.00% per year.

Source

These numbers are pretty sick, but is their dividend growth rate sustainable?

Payout ratio

This compares the dividend to earnings, and gives an idea of how sustainable the dividend is. If the payout ratio is low (say 33% or below), the dividend should be pretty secure, if the payout ratio is high (say 66% or above) start getting some answers, but if the payout ratio is above 100%, expect the dividend to be cut.

Valero dividend payout ratio for the months ended in Sep. 2019 was 0.61. During the past 13 years, the highest Dividend Payout Ratio of Valero Energy was 0.63.

Cash Dividend Payout Ratio

Dividends come from cash flow, not earnings, so whether the payout ratio is suspect or not, one should investigate the cash dividend payout ratio as it gives a more accurate picture of whether the dividend is sustainable or not. Again the lower the number the better because if a company's cash dividend payout ratio is higher than 100%, it means that it's paying more in dividends than it's receiving in cash and not sustainable long term.

An easy way to calculate the cash dividend payout ratio is on a per share basis. In this case, the formula used is dividends per share divided by earnings per share (EPS).

Valero’s forward dividend is $3.60 and their EPS for the twelve months ending September 30, 2019 was $5.52. Thus, their cash dividend payout ratio is .65.

Debt To Equity Ratio

A quick and dirty assessment of the balance sheet is to look at the dept to equity ratio. If the company is highly leverage, it carries a great deal of risk and may increase the likelihood of default or bankruptcy. A high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. Thus, a number of 0.5 or less is ideal.

Valero Energy debt/equity for the three months ending September 30, 2019 was 0.42.

Dividend Growth

A quick rule of thumb, is you want to see a company’s dividend growth growing faster than the rate of inflection. In the case of Valero, they pass with flying colors.

Thus based on my assessment Valero's dividend and the dividend growth rate is differently sustainable.

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.