Wednesday, May 25, 2016

Recent Buy: Valero Energy Corporation

May 20, 2016: Bought 32 shares of VLO at $55.84 per share.

Founded in 1955 and based in San Antonio, Texas, Valero Energy Corporation (NYSE:VLO) is an independent petroleum refining and marketing company. The company's refineries produce conventional and premium gasoline, including gasoline meeting the specifications of the California Air Resources Board. VLO's ethanol segment produces ethanol and distillers grain.

VLO is a Dividend Challenger with a 6-year streak of dividend increases. The company pays quarterly dividends of 60¢ per share in the months of March, June, September and December. At the current share price of $55.28, the stock yields 4.34%.

Before this buy, I owned 40 shares of VLO, which I transferred from my Roth IRA account just a month ago. A drop in the share price in the past month has given me an opportunity to buy more shares.

Usually, I buy shares in chunks of about $2,500 at a time. This buy totals only $1,786.87 because that is about the amount I had available in cash in my Roth IRA account where I hold my VLO shares. So the buy is about $713 short of a 'full' position. In time, as I receive dividends in my Roth IRA account, I'll find an opportunity to buy more VLO shares.

I now own 72 shares of VLO, at an average YoC of 4.06% and a cost basis of $59.12 per share. Here is a chart showing my buy prices:


With this buy, I'm adding $76.80 to DivGro's projected annual dividend income (PADI). As of the writing of this article, DivGro's PADI is $11,300.

The following table presents updated ratings of VLO from various sources:

 Morningstar Rating (****-) Credit Rating: BBB+
 Dividend.com's DARS Rating  3.3/5 (Neutral) 
 TheStreet's Quant Rating  B+ (Buy)
 The Motley Fool's CAPS Rating (****-) 
 Thomson Reuters StockReport+ (6/10) Neutral 
 S&P Capital IQ's Stock Report Buy (****-) Quality Ranking: B 
 Zacks Rank (Style Score)  3-Hold (VGM:B)
 Tipranks Analysts Consensus Rating   Moderate Buy
 †combined Value/Growth/Momentum score

According to Tipranks, based on 4 ranked analysts offering 12-month price targets in the last 3 months, the average price target for VLO is $66.50. Morningstar's fair value estimate is $68, while S&P Capital IQ calculates a fair value of $62.30 and a 12-month price target of $67.

Recently, I started using the fundamental analysis tools available at finbox.io. The site provides a comprehensive list of stock valuation models and a quick way to view the average fair value estimate of several models with default settings. The average fair value for VLO is $87.23, implying an upside of 58%.

The following F.A.S.T.graphs chart predicts a share price of $55.06 at the end of 2017 based on VLO's normal P/E of 8.0 and earnings projections.


Why VLO?


I continue to like VLO for its attractive dividend yield, now well about the 4% mark, and an exceptional 10-year dividend growth rate of 25.6%. The company has been increasing dividends regularly and often more than once a year, including 3 times in 2015! According to gurufocus, VLO's payout ratio is quite low at 26%, which means there is room for further dividend increases in the near future.

VLO has the most diversified refinery base among all the independent refiners. Capacity is 3 million barrels per day. Also, VLO refines cheaper, lower-quality oil with better profit margins. The supply of light crude available in the Gulf Coast should increase over time, to the benefit of VLO's refineries.

The most recent quarterly earnings report was disappointing, as earnings were cut nearly in half from the year-ago quarter. Revenues were better than expected, but nevertheless down 26.3% year over year. The main reason for the poor performance is due to elevated inventories from a warm winter, which weighed on distillate margins. Gasoline and distillate margins should improve as we enter into the summer months.

VLO is trading at a very low forward P/E ratio of just 7.79. With refining margins likely to get the usual summer gasoline boost, VLO is in a good position to perform well in the next few months.

32 shares of VLO adds $76.80 to DivGro's projected annual dividend income. I updated my portfolio to reflect this recent purchase. 
What do you think of VLO as a dividend growth stock? Do you own shares of VLO or are you planning to buy shares? Please share your thoughts in the comments below.

2 comments :

  1. $55 seems like a good entry point for VLO. Good dividend yield which is in an increasing trend. Refiners are good ways of getting into oil&gas without higher risks from other oil&gas players. Thanks for sharing!

    BeSmartRich

    ReplyDelete
    Replies
    1. Hi BeSmartRich! VLO's yield is right at 4.4% now which is quite nice, especially for a stock such a solid 10-yr dividend growth rate. I'm hoping that VLO would stick it out and continue to pay (and raise) its dividend. Fingers crossed. Take care and thanks for commenting!

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