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Inside Valero’s Dividend Yield Today: 2nd Place, but Discounted Valuations

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Valero’s dividend yield

Valero Energy (VLO) is the second-highest dividend-yielding stock among the seven refining stocks we’re comparing in this series. Valero is an American downstream company with refining, midstream, and ethanol business segments. The company’s market cap of ~$38 billion ranks it second among our seven refining companies.

Valero has a current dividend yield of 3.3%. In 4Q17, VLO has made a dividend payment of $0.70 per share, which was declared on November 1, 2017, and paid on December 12, 2017. VLO has paid dividends consistently in the past three years, and dividend payments rose during this period.

Three years ago, VLO made a dividend payment of $0.28 per share on December 17, 2014. Notably, Valero’s peer HollyFrontier’s (HFC) dividend payments have also risen in the past three years.

Valuations

Valero is trading at a forward PE (price-to-earnings) ratio of 13.9x—up from 8.0x in 3Q14—which is below the peer average of 14.5x. VLO is progressing on its growth path with an aim to create an integrated downstream value chain.

However, Valero’s earnings are being impacted by high compliance costs. In 3Q17, Valero incurred ~$230 million in RIN (renewable identification number) expenses. PBF Energy’s (PBF) RIN costs stood at $83 million, in 3Q17, while HollyFrontier’s (HFC) RIN expenses were $90 million.

In the first nine months of 2017, VLO incurred $631 million in RIN purchases. In 2016, VLO incurred ~$750 million—about 21% of its operating margin. The cost is forecast to be between $750 million and $850 million in 2017.

VLO is thus trading below the peer forward PE average likely due to its RIN burden. RIN prices can be very volatile. For more on RINs, you can refer to Market Realist’s “Gauging the Impact of RINs on Refiners: Bane or Boon?

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