I recently just opened a position in Marathon Petroleum (MPC). I wanted to make a position in an oil company and simply could not decide which one. The big guys were on the list, Chevron (CVX) and Exxon Mobil (XOM). But there was just something about them that did not sit easy with me I couldn't but my finger on it. Phillips 66 (PSX) came in a close second. Here is a look at why.
First, as always I wanted to run Phillips through some basic numbers, based on Graham's suggestions for common stock. Here is what I got.
- Philips is in the energy sector, it is the refiner spin-off of ConocoPhillips (COP).
- Phillips sits at over $160 Billion in revenue in the past twelve months. The total assets amount to $51,151,000,000 and liabilities are at $29,807,000,000. Phillips is very well financed.
- Phillips currently pays a $1.25 dividend at a 1.9% yield. Their payout ratio sits at 10.00%, plenty of room to grow.
- Phillips currently exhibits an 8.5 P/E which is low. At a P/E of 20 the company would be priced at $154.00. Currently, the Graham Number sits at $77.28.
How does it look?
From basic valuation metrics Phillips 66 looks undervalued and in a great position. Phillips has great revenue numbers and is nicely financed. There is a reasonable P/E and it comes in well under its Graham Number. Honestly, there really is no reason for Phillips to not be in any portfolio for a long term investor that reinvests dividends. They plan on continuing regular dividend increases and repurchasing shares when cash flow allows it. If you have time read the 2012 annual report. Here is how Phillips is returning value to share holders.
Phillips 66 returned $576 million of capital to shareholders in the first quarter, representing 26 percent of its cash from operations. The company paid $194 million in dividends, an increase from $157 million in the fourth quarter of 2012. During the first quarter, Phillips 66 also repurchased 6.4 million shares of common stock totaling $382 million, compared with 5.0 million shares totaling $245 million in the fourth quarter of 2012. By the end of the first quarter, the company had repurchased 14.0 million shares of common stock as part of its $2 billion share repurchase program.
So why not Phillips?
I did not choose Phillips simply based on a matter of preference. Both companies have a yield just below 2%. Based on their annual reports Phillips plans to return shareholder value by dividends and then retire shares when able. Marathon on the other hand has an aggressive share repurchase program in effect. Phillips addressed the annual report "To our Shareholders". Marathon addressed it "Fellow Shareholders". I prefer an aggressive share repurchase program over yield. As I believe by retiring the shares I will reap a higher value over the long term.
There is no reason to not invest in Phillips as long as you have room in your portfolio for an energy stock. At this time I only have room for one, but that may change. Phillips is undervalued, pays a respectable dividend at a ridiculously low payout ratio. Phillips plans to increase the dividend in the future. Phillips also plans on buying back shares which for the long term investor will help own more of the company.
After I test companies against a framework I am able to see how they compare and contrast. In this case, both companies are almost identical in valuation. They both want to return shareholder value over the long term. If you prefer dividends over share buybacks and you are looking for an oil refiner, Phillips 66 is a great company to start a position in.