Thursday, September 17, 2015

Phillips 66 (PSX) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Phillips 66 (PSX). Below are some highlights from the above linked analysis:

Company Description: Phillips 66, spun off from ConocoPhillips in 2012, is one of the largest independent refiners and marketers of petroleum products in the U.S.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

PSX is trading at a discount to 1.), 2.) and 3.) above. When also considering the NPV MMA Differential, the stock is trading at a 33.0% discount to its calculated fair value of $120.29. PSX earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

PSX earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. PSX earned a Star for having an acceptable score in at least two of the four Key Metrics measured.

Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2005-2008, 2006-2009, 2007-2010, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 15 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

PSX earned a Star in this section for its NPV MMA Diff. of the $6,861. This amount is in excess of the $2,000 target I look for in a stock that has increased dividends as long as PSX has. If PSX grows its dividend at 15.0% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 2.92%. PSX earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.

Peers: The company's peer group includes: Marathon Petroleum Corporation (MPC) with a 2.7% yield, Valero Energy Corporation (VLO) with a 2.5% yield and Western Refining, Inc. (WNR) with a 3.1% yield.

Conclusion: PSX earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks PSX as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $132.29 before PSX's NPV MMA Differential decreased to the $2,000 minimum that I look for in a stock with 15 years of consecutive dividend increases (including its predecessor companies.) At that price the stock would yield 1.7%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,000 NPV MMA Differential, the calculated rate is 15.0%. This dividend growth rate is the same than the 15.0% used in this analysis, thus providing no margin of safety. PSX has a risk rating of 1.75, which classifies it as a Medium risk stock.

PSX is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. The company should reap feedstock advantages from a growing North American crude oil production. The stock is currently trading well below my calculated fair value price of $120.29. Much of the calculated fair value is derived from a 15%+ dividend growth rate. However, with a negative free cash flow payout of -146% over the last twelve months, this dividend growth rate is not sustainable. As such, I will wait for a more opportune time before initiating a position.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in PSX (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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