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By How Much Will Phillips 66 Raise Its Dividend?

Mar. 08, 2018 4:51 PM ETPhillips 66 (PSX)13 Comments
Aristofanis Papadatos profile picture
Aristofanis Papadatos


  • Phillips 66 seems to have been trapped in a sour spot lately.
  • Its refining segment benefits from lower oil prices, whereas its midstream segment benefits from higher oil prices.
  • Nevertheless, the company is shifting from heavy investment to cash generation.
  • This bodes well for the upcoming dividend hike, particularly given the strong balance sheet and the low payout ratio of the company.

Phillips 66 (NYSE:PSX) has lost 12% since it peaked in January. In addition, Buffett recently announced that he was selling almost half of his stake in the company. Therefore, the upcoming dividend hike of the company will offer some consolation to its shareholders. The big question is what dividend hike they should be expecting.

Phillips 66 is a highly diversified company, with each of its segments behaving differently under various oil prices. Since the price of oil began to collapse in 2014, the refining segment has been by far the most profitable segment. When the price of oil is suppressed, the demand for oil products improves and thus boosts the refining margins. Even last year, when the price of oil rallied off its bottom, the refining segment of Phillips 66 still earned as much as the other three segments combined. Nevertheless, as the price of oil currently stands near a 3-year high, the profits of this segment have significantly decreased. To be sure, they decreased 33%, from $550 million in Q3 to $371 million in Q4.

Although the refining segment has been the most profitable in recent years, the management of Phillips 66 has repeatedly stated that the midstream segment is the flagship of the company in the long run. This segment benefits the most from high oil prices. Therefore, it is not surprising that its profits have remained under pressure in the last few years. While the rally of the oil price last year boosted the earnings of this segment from $280 million in 2016 to $464 million in 2017, the midstream segment still generated only 15% of the total earnings of the company.

To make a long story short, when the price of oil is very low, the earnings of the refining segment skyrocket. When the price of oil is high, the

This article was written by

Aristofanis Papadatos profile picture
I am a chemical engineer with a MS in Food Technology and Economics. I am also the author of 2 mathematics books ("Arithmetic calculations without a calculator" and "Word Problems") and perform almost all the calculations in my mind, without a calculator, making it easier to make immediate investing decisions among many alternatives. I invest applying fundamental and technical analysis and mainly use options as a tool for both investing and trading. I have nearly achieved my goal of early retirement, at the age of 45. In my spare time, I follow Warren Buffett's principle: "Some men read playboy. I read financial statements".

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Comments (13)

Cheniere Energy check it out 😊
I'm confused about a lot of the reactions to the share buy back from Buffet. A $3.3 Billion buyback of a less than $50 Billion company is not an insignificant move. If earnings stay completely flat, it will raise EPS by 6%. The retirement of shares saves $90 Million a year in dividends. I'm looking for a higher dividend raise form those two facts alone.

Buffet still owns 10% of the company. You have to understand how he thinks about buy backs as well. Executing the move all at once at what he believed was a reasonable price for him AND for the company he has a significant stake in is a win win. This is not a zero sum game. Both parties came out as winners. Buffet now has less regulation to deal with. The earnings and dividend per share for his remaining shares will go up. The company is now able to raise the dividend higher which will result in higher PPS making the buyback at this level more attractive for all shareholders.....

If anything I see this move as buy signal. I don't understand why everyone is now looking at this stock with trepidation. This is a solid base hit double yet most seem to be looking at it like a strike...
PadreSooner profile picture
I agree with you, but I think many investors are unsure whether the drop down below 10% is just a front in order to sell the rest of the position in the coming months (or there is the opposite theory that BRK will now move to buy the whole company or do some other acquisition in a related area). Although Buffett released a statement that the sale was just to remove the regulatory headaches many investors believe there may be something more to it. I think that after BRK releases it’s stock holdings in the next quarter or two if the PSX ownership stake remains flat that this speculation will die down. As a long in both PSX and BRK I feel good about this deal for both- but on the BRK side only if the $3.3B in cash can be put to other productive uses in the near future.
ship99 profile picture
Thank you well written. I have management on watch due to the share repurchase from WB.
If they deliver this year then they will be in good shape again. If WB keeps his remaining stake then this will go higher. We will know on May 15 when the next 13F comes out.
I believe Buffett indicated he expects to hold his remaining shares for the long term. He may have to trim on occasion due to the buybacks to keep his stake at 10%.
You'll be lucky if there is no cut.
Please explain
There is practically no chance of a dividend cut. I think the likelihood of a far distant star going supernova resulting in a gamma ray burst that precisely hits earth wiping out all life is actually more likely than a dividend cut from PSX.
David Johnston profile picture
I hate it when that happens
xrmfgk profile picture
Is “midstream” PSX or PSXP?
Both PSX and PSXP have midstream assets, but the trend has been to drop midstream assets down into PSXP, so I expect that entity will eventually own most of their midstream.
thurston profile picture
PSX owns a lot of shares or units (it looks like over 50%) in PSXP.
$0.77 sounds reasonable but given tax reform/tax cuts and the track record $0.80 can't be ruled out which would make me absolutely giddy.

I continue to be alarmed by WB liquidation.
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