Valero Earnings: Strong Results Keep Payouts High; Expect More of the Same

Valero Energy reported first-quarter 2023 earnings that once again surpassed market expectations, largely on stronger-than-expected refining results, as the company continues to enjoy a favorable refining margin environment. Adjusted earnings fell sharply to $1.3 billion during the fourth quarter from $3.1 billion the year before. During the quarter, Valero paid $1.4 billion in dividends and repurchases, for a payout ratio of 74%, well above its 40%-50% annual target. However, management noted in times of strong market conditions, payouts will exceed that level, and it will act more as a floor. Given the current market outlook, investors should expect those higher payout levels to continue in the near term. We plan to update our model with the latest market conditions and second-quarter 2024 guidance but do not expect a material revision to our fair value estimate or a change to our narrow moat rating.