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Don't Buy Valero Energy Corporation (NYSE:VLO) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Valero Energy Corporation (NYSE:VLO) is about to trade ex-dividend in the next day or so. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Valero Energy's shares before the 4th of August in order to be eligible for the dividend, which will be paid on the 2nd of September.

The company's next dividend payment will be US$0.98 per share, and in the last 12 months, the company paid a total of US$3.92 per share. Based on the last year's worth of payments, Valero Energy has a trailing yield of 5.9% on the current stock price of $66.97. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Valero Energy paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Valero Energy didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year, it paid out dividends equivalent to 262% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Valero Energy is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividendNYSE:VLO Historic Dividend August 2nd 2021

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Valero Energy was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Valero Energy has lifted its dividend by approximately 35% a year on average.

To Sum It Up

Is Valero Energy worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Valero Energy despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, Valero Energy has 3 warning signs (and 1 which is significant) we think you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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