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Stock Strategist Industry Reports

Are Independent Refiners' Dividends Safe?

High yields indicate opportunity as the probability of cuts is low.

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Refining market conditions remain dour as the coronavirus pandemic continues, but with the vaccine rollout underway, there is light at the end of the tunnel. Although we expect an economic recovery is likely to begin in 2021, an improvement in refining market indicators such as inventory and utilization levels are likely to lag and could keep a lid on margins in the near term. Ultimately, though, we see petroleum product demand recovering toward prepandemic levels, normalizing inventory and utilization levels and lifting refining margins toward midcycle levels. The equity markets are less sanguine, however, and continue to price refiners’ shares as if margins will not recover, keeping dividend yields near historical highs. We see little risk of dividend cuts thanks to large cash balances and improving cash flow. As such, at current levels, refiners continue to present an opportunity as a play on economic recovery. Valero (VLO) continues to stand out on valuation, quality, and dividend safety.

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Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.