Thursday, January 31, 2013

Ka-Ching! Phillips 66 just gave me (another) 25% raise

Another week and another big raise, but this came from an unexpected stock, Phillips 66 (PSX). Why was it unexpected? Well because they already gave me a 25% raise three months ago!

PSX has been on an impressive run since it split away from its parent company ConocoPhillips (COP). Not only has it raised its dividend three straight quarters and over 50% since it began trading earlier this year, its stock price has also increased by more than 75%. Those would be impressive numbers for a stock over several years, let alone several months. So how has PSX managed to do this in such a short time?

PSX has three primary business segments.

  1. Oil Refineries - PSX has processing plants where crude oil is processed and refined into more useful products such as gasoline, diesel fuel, asphalt base, heating oil, kerosene, and liquefied petroleum gas.
  2. Midstream - Gathering, transporting, and storing oil and natural gas. The company’s principal midstream asset is its 50% stake in DCP Midstream Partners LP (DPM).
  3. Chemicals - Their chemical company, CPChem, is a producer of olefins and polyolefins, and a leading supplier of aromatics and styrenics (whatever those are). CPChem, is a 50-50 joint venture between Chevron (CVX) and Phillips 66 
The majority of their business falls in the refinery section, and this is where they are making a lot of money. Refinery companies have typically in the past made a small percentage on the products they produce from the cost of the oil they bring in. In the current environment though, that percentage (profit margin) has increased. They are bringing in cheaper oil due to high domestic production growth, which is allowing them to make more on the refined products they sell. This is a very basic explanation, if you wish to learn more I suggest you research "brent crude vs wti".

With these big gains from their refinery business PSX's management has been able to comfortably increase its dividend and fund an additional $1 billion into its stock repurchase program. How long will the cost difference that benefits the refinery exist? Hard to say, but I don't think management would risk increasing the dividend if it could not be easily covered in the future under slimmer profit margins.

PSX has also announced that it will spin-off some of its midstream business into a MLP. CEO Greg Garland stated “We expect to use the master limited partnership as an efficient vehicle to fund growth investments in the transportation and midstream sectors. We believe the proposed MLP will enable us to enhance value for our shareholders and increase the transparency of our business.” Details are still scarce on this spin-off, in particular what assets will be included, but this could be another shrewd and profitable move by management.

PSX began trading last year at $34 paying a quarterly dividend of $.20 with an effective annual yield of 2.3%. After the back-to-back dividend raises ($.20 -> $.25 -> $.3125) my yield on cost has already increased to 3.7%. I certainly don't expect the pace and size of these increases to continue, and I imagine management will soon move to an annual dividend increase policy. But I'm not going to complain if they have a few more of these surprises up their sleeves.

DisclosureI am long PSX and COP

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