Valero Energy’s broad refining footprint and global assets position it to benefit from rising long-term demand for petroleum and liquid fuels.
Strong cash flow generation supports robust dividend growth and aggressive share buybacks, enhancing total shareholder returns and compounding value.
Despite a premium valuation versus peers, I see VLO as a ‘Buy’ for its dividend compounding potential and commitment to returning cash to shareholders.
Valero’s disciplined payout policy and history of increasing dividends make it an attractive choice for income-focused investors seeking exposure to the energy sector.
Valero Energy (NYSE:VLO) is a growing, diversified energy company with large refining capacity that positions it to profit from growing demand for petroleum and other liquid fuels in future decades.
The refiner has assets outside of the U.S. as well which could become more valuable as petroleum and liquids fuel demand is anticipated to grow particularly fast outside of the United States in the future, according to projections made by the U.S. Energy Information Administration.
Valero Energy produces a considerable amount of profits, and is buying back shares at a steady clip as well, average $2.1 billion per-annum in the last ten years. Valero Energy’s is poised for more dividend growth and the stock has a moderate valuation multiple.
Broad Refining Footprint With A History Of Profit Growth
Valero Energy is a Texas-based refining company with a main refining focus on the U.S. Gulf Coast. The energy company is a leading manufacturer and marketer of transportation fuels and petrochemicals, and thus is one of the biggest refining platforms in the United States.
Valero Energy’s refining capacity amounted to 2.7 mmbpd in Q1’25, with the majority of its capacity strategically located near the U.S. Gulf Coast. Other refining assets can be found in the U.S. Mid-Continent and the North Atlantic regions.
Petroleum and liquid fuel consumption is anticipated to rise in the next couple of decades, setting Valero Energy up was long-term tailwinds for profit growth. As refineries are processing fossil fuels, the sector could potentially also profit from a rollback of green energy subsidies under a Trump Administration.
We have already seen a number of American car companies scale back their electric-vehicle transition plans in light of moderating demand for high-cost EVs. Ford Motor (F), for instance, cut F-150 Lightning production targets last year as EV demand noticeably slowed.
Moreover, General Motors Corp. (GM) just a few days ago clarified that it was doubling down on the production of gas-powered cars in Michigan which is where the company sees stronger demand moving forward. Based on estimates from the U.S. Energy Information Administration, petroleum and liquid fuels consumption is poised to grow in the future, with growth coming mainly from the Middle East and from India.
Furthermore, U.S. refining capacity is already under pressure, specifically on the West Coast, as Phillips 66 (PSX) and Valero Energy have announced refinery closures in response to higher requirements for California-grade gasoline.
Valero Energy’s is highly profitable on a cash flow basis and has been so consistently for at least the last five years. As you can see below, Valero Energy’s operating cash flow spiked in 2022 to $13.7 billion was catalyzed by a post-pandemic demand surge and a strong economic recovery.
In 2024, Valero Energy produced $5.5 billion in operating cash flow and though the refiner suffered a 50% decrease in its operating cash flow YoY, it generated more than enough cash to finance its growing dividend.
In my view, the dividend is what makes Valero Energy appealing to passive income investors, and particularly the fast pace of the company’s pay-out growth.
The refining company paid out 78% of its adjusted net cash from operating activities in 2024 and an average of 70% between 2015 and 2024. The 2020 spike to 184% was driven by an exceptionally bad year for refining and upstream companies as demand for energy evaporated as economies shut down during Covid. Valero Energy is targeting to pay out 40-50% of its adjusted operating cash flow, at a minimum, across the business cycle.
Valero Energy’s refining business is highly profitable, setting the company up for a fast pace of share repurchase-driven cash returns. Between 2014 and 2024, Valero Energy repurchased 20.9 billion worth of its own shares in the market and substantially increased its dividend as well. On average, the refinery company repurchased a little more than $2.1 billion per-annum of its stock.
Consequently, Valero Energy has drastically lowered the amount of its available shares in the market (by 21%). Share repurchases increase the amount of future earnings attributable to investors and are one way for corporations to create value for investors, in addition to the payment of a growing dividend.
In my view, Valero Energy is primarily a ‘Buy’ for its future potential for dividend growth in a market that will continue to rely on fossil fuel-oriented refineries. In terms of growing its dividend, the refining company has done a solid job in the last thirteen years: the dividend has skyrocketed 595% since 2012 or an average of 16% growth per-annum.
VLO Vs. Other Refining Peers
Valero Energy is presently trading at a leading 2026e profit multiple of 14.6x with the refining company’s multiple reflecting 45% anticipated profit growth next year.
Though Valero Energy has the lowest anticipated profit growth rate in the refining peer group, and the second-highest Price-To-Earnings ratio after Marathon Petroleum Corp. (MPC), I think that the refining company has long-term earnings upside associated with growing needs for refining capacity.
Taking into account Valero Energy’s impressive share repurchases and dividend growth I think that I would be okay with paying a top-of-the-range multiple of 15.0x, partially because I want to own the stock for its dividend compounding potential. This leading profit multiple would lead us to an intrinsic value of $150.
With a yield of 3.1%, Valero Energy is only outmatched by Phillips 66 which offers passive income investors a yield of 3.8%. Since I want to add a refinery company to my portfolio for diversification and yield, and I am primarily looking to collect dividend income, I am initiating Valero Energy with a ‘Buy’ stock classification.
Valero Energy is growing, but the refinery may be subjected to considerable demand changes from one year to the other, as refining margins and prices ultimately depend on market prices for crude oil. Over the course of an entire business cycle, however, investors should not be affected by changes in earnings and cash flow.
Refinery shortages, particularly in California, could drive up the price for refining products, so refinery closures could ultimately end up improving the risk/reward relationship for refining companies with business in California.
My Takeaway
Valero Energy is a growing refining company with a broad asset footprint in the United States and abroad. Valero Energy is a particularly compelling investment, in my view, because it has a history of increasing its dividend and it spend a big amount of its excess cash flow on share repurchases (north of $20 billion in the last decade).
In my view, Valero Energy is a solid refinery stock to own if capturing a growing dividend is a primary concern for you.
Moreover, Valero Energy has made a commitment to minimum cash flow returns (40-50% of its operating cash flow) across the business cycle which should yield a handsome amount of buybacks each year, in addition to the dividend. Buy.
By: On the Pulse / Jul. 21, 2025
