At the beginning of 2022, the very painful era of Covid-19 was coming to an end for the shareholders of Delek US Holdings (NYSE: DK) with their dividends likely to be reinstated imminently after their first quarter results, like my previous article Underline. Thankfully, they didn’t disappoint with their dividend restoration and, looking ahead, it looks like more is on the way, which should push their dividends well beyond their current low yield of 3. 30%, as shown in this follow-up analysis.
Executive summary and ratings
Since many readers are likely short on time, the table below provides a very brief summary and ratings for the main criteria assessed. This Google Doc provides a list of all my equivalent grades, as well as more information about my grading system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial situation.
After seeing a recovery from the end of 2021 and the first quarter of 2022, their cash flow performance in the second quarter far exceeded anything seen before, their operating cash flow for the first half of $586 million easily beating any annual result since at least 2019, despite being literally only half the time. In fact, if you zoom in on their results for the second quarter in isolation, it sees operating cash flow of $559 million, and so they effectively saw an entire year of cash generated in just one quarter. . Importantly, this was not simply the product of working capital movements with their underlying results which excludes such movements showing a very similar result, as shown in the chart below.
Even after removing their temporary working capital movements, which were minimal in the second quarter of 2022, he still sees their underlying operating cash flow at $550 million and thus well ahead of everything since the beginning of the recession in 2020, thus marking the end of the very painful era of Covid-19. Obviously, it would be quite foolhardy to expect this booming cash flow performance to continue indefinitely into the future, especially given the risks of impending recession and given the inherently volatile nature of their industry, it’s impossible to pinpoint exactly where it will land for any particular quarter. At least their shareholders can now enjoy meaningful cash returns with their dividends restored, helping to ease the discomfort of investing in this volatile industry.
Even though this was clearly communicated during their Q1 2022 conference call, according to my previously linked article, it was still positive to see more than a token dividend with their new quarterly rate of $0.20 per share representing close to two-thirds of their old rate of $0.31 per share which was suspended in 2020. In addition to restoring their quarterly dividends, they also launched a $400 million share buyback program, which equates to approximately 23% of their shares given their current market capitalization of approximately $1.7 billion.
Although I’m not normally a fan of share buybacks, at least they haven’t completely neglected their dividends and so going forward it will be interesting to review the pace of their realization and, above all, if the number of lower shares translates into comparable dividend growth. on a per share basis. Even without reducing their number of shares, it should be possible to see their quarterly dividends recover to their previous level of $0.31 per share, because given their last number of shares outstanding of 71,035,056, they would not cost only $88 million a year.
At present, their booming cash performance would easily allow for very strong dividend coverage given their free cash flow of $463 million in the first half of 2022, but even under more typical operating conditions. , it should always be possible. Even if they were to only see around $500 million in operating cash flow for the full year, like in 2019, those dividend payments wouldn’t even be a fifth of their cash inflows, thus offering ample leeway to finance them via free cash flow. , depending on their future capital expenditures.
Obviously their future capital expenditures leave a question mark, but while 2019 saw $700 million invested, they have since dropped significantly each year, with 2020 and 2021 seeing only $303 million and $225 million respectively. dollars. Looking at their long-term capital allocation strategy, they see only $112.5 million per year of mid-term sustaining capital spending, as shown in slide fifteen of their May 2022 investor presentation. Meanwhile, those same indications don’t necessarily point to their capital spending growth, but they do point to very high internal rate of return targets of 15% to 50%, which I think will keep their spending going. modest overall capital on average, as they seem to be focused on value rather than size or volume.
Thanks to their extremely strong cash performance during the second quarter of 2022, they were able to finance their acquisition of 3Bear Energy without imposing too high a cost on their capital structure. Even though this acquisition ultimately cost $621.7 million, their net debt ended the second quarter at $1.573 billion and therefore close to their previous level of $1.359 billion after the first quarter. As a result, their net debt has not increased as feared when performing the previous analysis and therefore, obviously, neither has their leverage. With their net debt only marginally higher and very likely to decline in the third quarter given these operating conditions, it would be redundant to reassess their leverage in detail, or their liquidity as their cash position of $1.245 billion remains plump.
The two relevant graphs have always been included below to provide context for any new reader, which show their respective net debt to EBITDA and net debt to operating cash flow at 1.12 and 1.21 falling in the low territory between 1.01 and 2.00 after the second quarter of 2022. While their previous respective results of 2.70 and 3.46 after the first quarter were in the moderate range between 2.01 and 3, 50. Meanwhile, their strong liquidity also saw their respective current and cash ratios improve over those same two periods to 1.08 and 0.29 from their previous respective results of 0.97 and 0.20. . If you are interested in more details on these two topics, please refer to my previously linked article.
The end of the very painful Covid-19 era is well and truly here, with their dividends restored and well on their way back to their old pre-pandemic levels. Fortunately, they sport a healthy financial position with low leverage and strong liquidity, which helps provide support to see the remaining gap closed in the years to come. Given that their share price of around $25 is still around 25% lower than its pre-Covid-19 pandemic level of around $32.50 despite these booming operating conditions, I think maintaining my Buy rating is appropriate as their prospects of providing greater dividend growth should help it recover more of its prior value.
Notes: Unless otherwise noted, all figures in this article are from Delek US Holdings’ SEC Filingsall calculated figures were performed by the author.