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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Valero

April 3rd 2009 Valero
NYSE Symbol: VLO
Industry: Oil refiner
Stock price as of 4/6: $19.84

The dividend cuts keep coming. A surprise dividend cut a month ago from JP Morgan set off a flurry of other top financials cutting their dividends including GE and Wells Fargo. Luckily, there are a few blue chip defensive companies maintaining or raising their dividends. In the last several months, I've featured ten companies that have raised their dividends in the last year. The list includes 3M, McDonalds, Travelers, Kimberly Clark, Heinz, Caterpillar, P&G, Sysco, Abbott Labs, and Coca Cola. This week I'll feature an eleventh blue chip, S&P 500 company that raised their dividend last fall. The featured stock of the week is the worlds largest oil refiner, Valero Energy. Nothing went right for Valero last year. The largest U.S. refiner of crude oil into gasoline, diesel, and jet fuel saw its stock decline as oil shot up to $150 a barrel. Many predicted the stock and the company would perform better when oil pulled back. Yet, when oil did retreat, so did Valero's stock, falling to a four year low. But even though demand for oil remains low, Valero continues to generate strong profits in the billions of dollars and, as mentioned, they did raise their dividend last fall.
Valero's success will depend on an economic recovery. Luckily for Valero, the company has a distinct advantage over competitors as the lowest-cost producer of refined products. The company has a solid balance sheet with $5 billion in available liquidity ($940 million in cash) and has scaled back spending plans to $2.7 billion from $4 billion this year to preserve cash. It has more room to cut spending if needed with no major debt obligations for two years. Soleil Securities energy analyst Jacques Rousseau made comments that the industry as a whole is in a pretty tough time right now because of weakened demand and rising supply, but Valero is an industry leader and better positioned. If things get bad, a lot of companies would cry mercy before they Valero would run into trouble.
Another analyst at Argus raised Valero's target to $35 from $24 a share and believes that the company is in a strong position despite a negative refining outlook. The analyst continued saying the firm's outlook for refining remains negative, but believes that Valero is well-positioned to survive the downturn. The firm believes Valero's strategy, which is focused on delivering long-term value to shareholders by optimizing its refining portfolio and improving the quality of its core assets, will benefit shareholders. After years of patiently executing this strategy, the firm believes that the company is in a relatively strong position, with positive cash flow, a strong balance sheet, and the potential for long-term earnings growth. Valero also benefits from its ability to process heavy and sour crudes, which lowers its feedstock costs and enhances margins.
The valuation for Valero is very low. The stock trades for 0.11 times sales and 0.6 times book value of $30.25. The stock also trades for 7 times expected 2009 earnings and 5.6 times 2010 earnings. A very attractive valuation. The dividend yield is 3.2% and the company will go ex-dividend in May.