Phillips 66 (PSX) was separated from ConocoPhillips (COP) back in 2011 in order for the latter to separate its downstream businesses into an independent, publicly-traded company. Phillips 66’s four core segments include refining, midstream, chemicals, and marketing.
The company suffered last year along with its industry peers following the struggles caused by the COVID-19 pandemic. However, its recovery has been very strong due to the growing demand for oil. While I remain cautious when it comes to allocating capital in the oil majors, Phillips 66’s diversified operations and strong capital returns offer a noteworthy margin of safety.
Specifically, the company’s 5.18% yield seems well-covered and can provide robust capital returns in the current low-yield environment that investors, especially income-oriented ones, are likely to appreciate.
Further, Phillips 66 is a more defensive pick than pure refiners during the ongoing pandemic. The company’s minor loss of ($0.89) per share last year demonstrates its qualities compared to the massive losses some of its industry peers posted during the same period.
Further, Phillips 66 recently announced that it had agreed to acquire all publicly held common units in Phillips 66 Partners (PSXP) that it does not already own in an all-stock deal. The unitholders of PSXP will receive 0.5 shares of Phillips 66 for each unit of PSXP they own.
The exchange is expected to close in Q1 of 2022, and as Phillips 66’s management mentioned, the deal should unlock operating efficiencies and simplify the parent company’s corporate structure.
PSXP is a highly profitable and stable business too, which should further contribute to the parent company’s profitability expansion. As a result, I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Profitability and the Dividend
Phillips 66’s Q3 2021 results showcased significant improvements. The company’s refining margins more than doubled quarter-over-quarter following growing demand for oil products. The segment posted an adjusted profit of $184 million compared to an adjusted pre-tax loss of -$706 million in the previous quarter.
Midstream, chemicals, and marketing, also posted strong numbers, resulting in the company quadrupling its EPS quarter-over-quarter, from $0.74 to $3.18
Based on the company’s performance during the first nine months of the year and current market fundamentals, the company should be able to deliver EPS of around $4.25 for the full year. Further analysts expect EPS to grow by nearly 63% next year, and while oil prices are speculative, this is a testament to Phillips’ 66 robust assets and strong recovery performance.
As far as the dividend goes, the company has increased it annually every year since the spin-off from ConocoPhillips, now counting nine years of sequential annual DPS hikes. The latest increase by 2.2% this past October may be humble, but it speaks volumes to the company’s strong operating cash flows and management’s commitment to meaningful shareholder capital returns. The annual DPS rate of $3.68 should be well-covered by the underlying EPS, while the 5.18% dividend yield is certainly enticing.
Wall Street’s Take
Turning to Wall Street, Phillips 66 has a Moderate Buy consensus rating based on eight Buys and three Holds assigned in the past three months. At $93.00, the average Phillips 66 price target implies 30.1% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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