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a Stable 5.6% Yield With Shares of Valero L.P. |
Published: March 12,
2007
Valero L.P. (NYSE: VLI) was formed in 2001, when giant oil refiner Valero Energy (NYSE: VLO) spun off its pipelines, terminals, and storage tanks. The
master limited partnership became largely independent of the parent company and more than doubled its asset base with the 2005 acquisition of Kaneb's pipeline and services companies. Valero now boasts 9,300 miles of pipeline that carry crude oil and petroleum products from Texas to Minnesota. These government-regulated pipelines give the company a secure revenue base. The firm also operates terminals and crude oil storage tanks that generate stable fee-based revenue, partly secured by VLO's refining operations. About 48% of revenue comes from the regulated pipelines and 52% from the fee-based terminals and storage business.
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Dividend: Valero L.P. has increased its quarterly dividend an average +9% a year since initiating dividends in 2001. Its latest quarterly dividend of $0.915 translates to $3.66 per share annually, giving VLI a generous 5.6% yield at current share prices. The company pays out 87% of its distributable cash flow in dividends, giving it enough room to boost its dividends further in the coming years. Management has committed to hiking the distribution another +7% this year. Valero doesn't offer a dividend reinvestment plan.
Growth Drivers: Over the past five years since its inception, Valero has invested $3.6 billion in acquisitions, including the $2.9 billion Kaneb purchase. This acquisition provided Valero with a large inventory of expansion projects that should drive growth and increase distributions over the next few years. The 2007 planned expansion budget of $185 million is the largest in the company's history and will increase the firm's storage and distribution capacity in its fee-based terminal business. Tariff increases in line with inflation will also contribute to growth. Despite the company's rapid growth, it maintains a strong balance sheet with a debt to total capitalization figure of just 42%.
Outlook: After five years of relatively slow growth of about +4% per year, the company is expected to deliver double-digit earnings growth by 2008. Internal expansion projects should keep Valero L.P. on the fast track, with an estimated +7% annual growth rate over the next five years.
Risks include reduced demand for petroleum products, higher-than-anticipated maintenance costs on acquired assets, and downtime at Valero's refineries due to upgrades.
Action To Take ---> With its geographically diverse assets, stable revenue streams, and sound balance sheet, we consider VLI a fairly low-risk investment with solid dividend growth potential.
Please note that Valero L.P. recently announced plans to change its name to NuStar Energy L.P. The name change will be completed on April 2, 2007, and at that point in time the firm's ticker symbol will change from "VLI" to "NS."
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Editor's
Note: Carla Pasternak's model portfolios focus exclusively
on investment opportunities with ultra-high yields. In fact, in each
of her monthly High-Yield Investing newsletters she
provides readers with an entire portfolio of stocks, funds and
preferreds that are delivering annual dividend yields of +10% or
more. That's right -- in order to even be considered for
inclusion in this portfolio, an investment
must deliver cash payments of at least 10% per year. Visit
this link to learn more about Carla Pasternak's High-Yield
Investing newsletter.
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Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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