Published September 1st, 2015
On August 11th, I wrote the following about Phillips 66 (PSX):
Phillips 66 has a solid dividend yield of 2.7% and expected earnings-per-share growth of 5%+. The company has a very shareholder friendly management as well.
Best of all, the company has a low price-to-earnings ratio of just 11.8. Phillips 66 combination of decent growth, above-average dividends, and low valuation gives it a high rank using The 8 Rules of Dividend Investing.
Phillips 66 is not a value trap. The company is an undervalued downstream oil and gas giant with a shareholder friendly management that will very likely reward shareholders with continued dividend growth and share repurchases.
Warren Buffett must agree.
Berkshire Hathaway (BRK.A, BRK.B) recently disclosed a $4.5 billion stake in Phillips 66.
The company bought shares of Phillips 66 for prices between $71.12 and $77.22 from August 26th to 28th. The average price paid was $74.66.
Phillips 66 traded for lows of around $60 a share back in January of 2015. The stock is currently trading at around $79 a share.
At current prices Phillips 66 is still a bargain.
The company currently has a 2.8% dividend yield and a price-to-earnings ratio of only 10.2. Compare this to the S&P 500’s current dividend yield of 1.9% and price-to-earnings ratio of 19.9. Phillips 66’s earnings are trading for nearly fifty cents on the dollar, compared to the S&P 500.
No wonder Warren Buffett decided to buy in now.
Low oil and gas prices do not effect Phillips 66 like they do oil corporations that generate the bulk of their profits from upstream operations. To understand why and how, we will first take a brief look into Phillip 66’s history.
The company was created in 2012 when ConocoPhillips (COP) spun-off its chemical and downstream divisions. This makes ConocoPhillips very susceptible to low oil prices – the lower oil prices are, the less money it makes for finding and producing oil.
Phillips 66 on the other hand, is largely insulated from low oil prices. The company over 75% of its earnings from refining oil and selling chemical products made primarily from oil. A quick glance at the two companies’ stock prices over the last year (when oil prices have tumbled) drives home this point:
- Phillips 66 1 year stock price return of -6.6%
- ConocoPhillips 1 year stock price return of -36.7%
The stock market has not been particularly kind to Phillips 66, but it has absolutely pummeled ConocoPhillips – this is due to falling oil prices which reduce earnings at ConocoPhillips but not at Phillips 66.
Phillips 66 is an all weather stock. The company will very likely produce large earnings (and steady or increasing dividends) regardless of the overall economy or oil prices.
This should give the company a higher price-to-earnings ratio than more volatile oil companies that generate the bulk of their profits from upstream operations. Oddly, Phillips 66 does not have a higher price-to-earnings ratio than its upstream focused peers:
- Phillips 66 price-to-earnings ratio of 10.2
- ExxonMobil (XOM) price-to-earnings ratio of 13.4
- Chevron (CVX) price-to-earnings ratio of 12.5
- ConocoPhillips price-to-earnings ratio of 36.4
To be fair, ConocoPhillips price-to-earnings ratio is artificially high due to low earnings – the company is undervalued as well (as is much of the oil industry today). This does not take away from the fact that Phillips 66 is trading for such a low price-to-earnings ratio despite its resilience from falling oil prices.
Phillips 66 may not have seen steep price declines over the last year, but the market does not fully appreciate the growth prospects, steadiness, or shareholder friendly management of this stock.
Warren Buffett, however, does. Phillips 66 remains a bargain at current prices. The stock still ranks highly using The 8 Rules of Dividend Investing.