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Valero Energy: Expect The Dividend To Be Slashed Amidst Record Low Gasoline Prices

Published Wed, 25 Mar 2020 12:29:05 -0400 on Seeking Alpha

Even though most investors focus on oil prices, the crash in gasoline prices has been just as severe, which has naturally caused shares of Valero Energy to plunge as well.
They entered this downturn in a strong overall position with an excellent recent history of dividend coverage, however, this is virtually guaranteed to have turned negative now.
Their financial position is strong enough to ensure they remain a going concern, however, it can only afford to safety fund their dividend through debt for the short term.
This makes it likely that unless there is a sudden improvement in underlying operating conditions, management will be forced to once again reduce their dividend to protect their solvency.
Thankfully, there is nothing structurally wrong with their company and thus once conditions improve, shareholders should expect to see their dividend reinstated.
Whilst the crashing oil prices tend to receive the most attention, the crash in gasoline prices has been just as severe. This was kicked into hyper drive during trading on Monday, with prices plunging to the lowest levels on record. Naturally this has spilled over into immense selling of shares in refining companies, such as Valero Energy (VLO), which has pushed their dividend yield to a massive, but now increasingly common to see, 12%. Following the 2008-2009 financial crisis, they ultimately reduced their dividend by two-thirds at the beginning of 2010 and unfortunately it appears this turmoil could once again have a similar result.
Dividend Coverage
When assessing dividend coverage, I prefer to forgo using earnings per share and use free cash flow instead, since dividends are paid from cash and not from "earnings". The graph included below summarizes their cash flows from the last three years:

Image Source: Author
Naturally their free cash flow and thus dividend coverage has fluctuated across the last three years as commodity prices are notoriously volatile.... Read more