Whether or not Valero Energy Corporation (NYSE: VLO) can reach new highs in 2023 is yet to be seen, but the stage is set for this high-yield dividend payer to rebound. Shifts within the sell-side community have the stock trading at a discount to its peers, the energy industry and the broad market making it a ripe target for income investors.
The stock trades near 5.3X its earnings outlook after the recent correction, which is below its direct peers, which trade closer to 7X earnings and the integrated energy giants, which trade closer to 11X earnings. Add in the robust cash flows, still robust following the post-bubble correction in pricing and margin, and the 3.5% yield is more than attractive.
A Shift In The Analysts' Sentiment Helps VLO To Bottom
The analysts rate Valero Energy a Moderate Buy, which has held firm since last year. The sentiment moderated over the spring due to 2 downgrades and a handful of price target increases which helped the market to correct. Now that share prices are back in a more reasonable price region, the analysts' sentiment is shifting again. Bank of America is the first to come out with a positive revision, a price target increase to $160. That’s not the highest price target on Wall Street, but it is getting close, increasing the consensus price target by $1. The consensus is flattish over the last 3 months but rising in the near term and up more than 25% over the past 12 months.
More importantly, the consensus price target implies about 30% of the upside for the market, and it has begun to rise. This puts a floor in the price action that the institutions may aid. The institutional activity spiked to a multi-year high in Q2, resulting in a bearish bias, but the takeaway suggests a bottom could be in play.
The net of activity was bearish but by a slim margin, suggesting rotation within the group, not a flight to the sidelines. A look at the activity over the past 2 months will also show that selling was strongest as prices fell but shifted to the buy-side in late May and June, consistent with market rotation and the bottom in share prices.
The next obvious catalyst for VLO share prices is the Q2 earnings release. The company’s revenue is expected to decline significantly YOY, but mitigating factors exist. Among them are the price and margin decline associated with the YOY comp. Last year’s revenue and earnings surged along with post-COVID refinery throughput; the salient factor is that revenue is expected to improve sequentially and may easily beat the consensus figures.
The question is earnings. Earnings are also expected to fall, about 50% YOY and 36% sequentially, but remain well above pre-pandemic levels and in a range that ensures ample dividend coverage.
Valero Energy On Track For Dividend Growth
Valero Energy does not have a history of regular dividend increases, but it is known to make them and is positioned to do so this year. The company is paying out only 20% of its earnings outlook and has been outperforming on the bottom line by wide margins for the last several quarters. That has allowed debt reduction and balance sheet improvement, bolstering the already healthy distribution.
The price action in VLO stock is consistent with a bottom. The price action increased from the bottom a few weeks ago and may continue upward. The next hurdle is the long-term moving average near $120, which is already producing some resistance. If the market can get above that level, it could move up within the established trading range. The top of the range is near $150 and below the analysts' consensus estimates. If the analysts' sentiment keeps firm, the stock could move to new highs this year.