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Valero Energy Corp(VLO-N)

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Valero Energy's 22% Total Yield, Including Dividend and Buyback Yield, Is Attracting Value Buyers

Barchart - Tue Sep 27, 11:09AM CDT
Oil - iStock-694066262

Valero Energy Corp's (VLO) 22% total yield, which includes its 3.86% dividend yield and its 18.1% buyback yield, is attracting serious value buyers here. In addition, the stock has attractive put option income plays.

Valero Energy is a downstream oil and gas refining and oil products distribution company.  In Q2 Valero ramped up its stock buyback activity and made it clear it will keep it up.

Buybacks Were Affordable

During the quarter, Valero bought back $1.748 billion of its shares. That was well below the $5.4 billion in free cash flow (FCF) produced during Q2. In other words, it could easily afford the buybacks.

In addition, its dividends cost just $1.1 billion. Altogether it spent just $2.87 billion on buybacks and dividends, its shareholder capital returns. That represents just 52% of its FCF of $5.4 billion. So it could afford to buy back the shares and pay high levels of dividends at the same time.

That coincides with management's stated goal of paying out 40% to 50% of its cash flow to shareholders. 

Valero Investor Relations

Total Yield Is Attractive

The current dividend rate of 98 cents quarterly works out to an annual yield of 3.85% (i.e., $3.92 annually/ $101.54 price as of Sept. 27).

In addition, Valero's quarterly $1.75 billion buybacks work out to $7.0 to $7.5 billion annually. That represents an amazing 17.5% to 18.75% annually of its total $40 billion market capitalization (i.e., 18.1% on average)

As a result, investors in Valero Energy can expect a total yield of almost 22% annually. This is the result of adding together its 3.86% dividend yield and the average 18.125% buyback yield. 

That is a very high total yield and bodes very well for both a good return for shareholders as well as dividend per share growth.

Short Put Option Income Plays

In addition, enterprising investors can make additional income by shorting out-of-the-money (OTM) covered calls and OTM cash-secured puts with VLO stock. In this case, it turns out that the cash-secured put income plays are more attractive.

For example, the table below shows that for put options expiring in just 3 days investors can sell the $98.00 strike price puts and make $0.93 per contract.

VLO Puts - expiring 9-30-22 - Barchart - As of 9-27-22

That works out to an annualized rate of return of 0.95%. This represents an annualized return of 11.4% annually if investors do this every month. Moreover, the investor would not be forced to purchase the stock at $98.00 unless it falls 3.5% from its present price.

Moreover, the next month's option contract chain also has attractive short OTM covered call and put income option plays. I wanted to highlight this one now for enterprising investors.

Bottom line: value investors are looking closely at VLO stock given its attractive total yield and attractive short option income plays.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.