Phillips 66: Strong Refining Environment Allows For Increase In Shareholder Payouts

| About: Phillips 66 (PSX)
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Shares of Phillips 66 (PSX) ended the trading week on a strong note. The refiner and marketer of oil products announced increased payouts to its shareholders on Friday, prompting shares to rise some 2.7% to fresh year highs.

An Extra Christmas Present For Shareholders

The board of directors of Phillips 66 approved two large increases in returns to shareholders. The board has authorized a 25% increase in the company's quarterly dividend, which now will be $0.3125 per share, or $1.25 per annum.

The company furthermore announced the authorization of another $1 billion in share repurchases. The repurchase plan comes on top of the $1 billion repurchase program already approved in the third quarter.

CEO and Chairman Greg Garland commented on the plans, "This increase in our annual dividend and expansion of our share repurchase plan is another important milestone in our strategy for value creation. Our disciplined capital allocation and strong operating cash flow enable us to continue returning capital to our shareholders."

Phillips 66 points out that shares will be held in treasury, and as such will not be retired. This means that shares can readily be re-issued again to the public, without shareholder approval.

Boosting Earnings Per Share And Returns

Shareholders in the firm have seen great returns since the spin-off from ConocoPhillips (COP) in May of this year. From that point in time, shares have rallied over 55% from levels of $33 at the time to highs of $52 at the moment.

On top of these capital gains, shareholders receive payments in the form of dividends, and implicit payments in the form of share repurchases. The 25% increase in quarterly dividends boost the dividend yield to 2.4% again. As a result of the strong share gains, the dividend yield has fallen in recent months. The $2 billion share repurchase program is sufficient to retire roughly 6.1% of total shares outstanding.

Over the past four quarters, the company announced trailing annual earnings of $8.54 per diluted share, valuing the firm at 6.1 times annual earnings. Adjusting for the $2 billion repurchase plan, earnings could come in at $9.10 per diluted share, valuing the firm at 5.7 times annual earnings.

Investment Thesis

The spin-off of Phillips 66 from ConocoPhillips occurred at a time when the prospects for US refineries became really rosy. During the summer, the spread between WTI and Brent Crude rose to new lows, boosting refining margins for Phillips 66 and major competitors including Valero (VLO) and Tesoro (TSO).

In August, I took a look at the prospects for Phillips 66 which traded around $40 at the moment. I concluded that shares are a favorite value play, in the favorable refining environment. From that point in time shares have rallied another 30%.

While the refining conditions remain rather favorable at the moment, I stick with my long position in Tesoro. Valued at merely 5 times annual earnings, shares are a little more appealing given the acquisition of BP's (BP) Southern California refinery, at a dirt cheap price.

While I think Tesoro's valuation is a little more appealing than that of Phillips 66, both companies trade at cheap valuations despite the rally so far this year. The operating environment for both firms continues to be very favorable, resulting in very high operating cash flows in the meantime. This allows firms to hand out some extra presents to shareholders during the holiday season.

Disclosure: I am long TSO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.