In addition to being the most valuable U.S.-based energy company, ExxonMobil is a consistent dividend payer, with over 42 consecutive years of raising its payout. With a diversified business model and enough cash flow to invest in organic growth, acquisitions, and the energy transition, Exxon and its 3.3% yield are a compelling offering.
However, midstream, refining, chemical, and marketing company Phillips 66 (PSX 0.35%) also stands out as a good buy now. The company doesn't operate an exploration and production segment, making it significantly different from a major like Exxon or well-known upstream companies like ConocoPhillips or Occidental Petroleum.
Here's why Philips 66 is a reliable dividend stock worth considering, especially for investors with enough exposure to exploration and production companies and who want to diversify their oil and gas holdings.
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Shifting its focus
Phillips 66 was hit extremely hard by the COVID-19 pandemic -- posting a brutal $4 billion loss in 2020. For context, Chevron lost $5.5 billion in 2020, even though it is a much larger and diversified business than Phillips 66. Phillips 66's stock price fell like a rock, and it was clear that something had to change.
The company has been cutting costs and rethinking its portfolio. It is working on divesting retail and marketing assets in Germany and Austria and is targeting $1.4 billion in run-rate cost savings by the end of 2024. Phillips 66 hopes that the lower-cost profile paired with higher profitability will help it reach mid-cycle adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $14 billion by 2025, including the return of over 50% of operating cash flow to shareholders.
PSX EBITDA (TTM) data by YCharts. EBITDA = earnings before interest, taxes, depreciation, and amortization. TTM = trailing 12 months.
In the chart, Phillips 66 is keeping capital expenditures and operating expenses low as it works to grow its earnings. However, it is still making purposeful investments. For example, it has invested heavily in transforming its San Francisco Refinery into a biofuel facility that can produce more than 50,000 barrels per day (bpd) of renewable fuels.
In April, Phillips 66 announced that the complex is at 30,000 bpd of production and on track to hit the 50,000 goal by the end of the second quarter. The project has come at a steep cost, but Phillips 66 believes it's the right move to ensure it has a diversified portfolio and can meet the downstream needs of the energy transition.
In sum, Phillips 66 is producing impressive results and has set clear expectations for shareholders through medium-term targets and some major infrastructure investments.
Returning capital to shareholders
As Phillips 66 began returning to growth in 2022, it committed to return substantial capital to shareholders through dividends and buybacks. The company said it is on track to return $13 billion to $15 billion to shareholders between July 2022 and year-end 2024.
Since ConocoPhillips spun off its downstream assets to create Phillips 66 in 2012, Phillips 66 has raised its dividend at a compound annual rate of 16%, including a 10% increase in the quarterly dividend to $1.15 per share in April. The raise boosts Phillips 66 annual payout to $4.60 per share, presenting a forward yield of 3.3%.
Phillips 66 isn't nearly as large as integrated oil majors like ExxonMobil and Chevron, which have both upstream and downstream assets. However, it still has a sizable dividend expense of around $1.8 billion a year. Impressively enough, Phillips 66 has been spending even more on buybacks, including $4.2 billion over the last 12 months. Phillips 66 is taking advantage of a favorable period in the business cycle and directly rewarding shareholders.
Phillips 66 is worth a closer look
Philips 66 shares are down 19% from their all-time high, hit just a few months ago. But there's reason to believe the stock is now a buying opportunity.
Its price-to-earnings ratio of 10.8, which is within the range of its historical average. The dividend continues to grow and is already at an attractive level with a 3.3% yield.
Phillips 66 is also an industry-leading company with the resources needed to make sizable investments in new projects that could lay the groundwork for future biofuels projects. Add it all up, and Phillips 66 is a quality dividend stock to buy now.
