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Buffett Thinks Phillips 66 (PSX) Stock Is a Great Buy. You Should Too.

Investors who have followed in the very successful footsteps of Warren Buffett have, over time, grown very wealthy. Whether by investing in Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) directly or by picking and choosing from the limited portfolio of companies held by Berkshire, investors have found long-term capital appreciation opportunities supplemented often by fantastic dividends within Berkshire’s portfolio. Today’s focus is on one of his more recent additions: Phillips 66 (NYSE:PSX).

Warren Buffett Thinks Phillips 66 (PSX) Is a Great Buy. You Should Too.

In this article, I’m going to examine PSX stock and discuss why it remains a long-term buy-and-hold opportunity for investors looking at integrated and diversified oil & gas companies in this low-price commodity environment.

Refining Is Just One Part of the Business Model

In the minds of most investors, Phillips 66 is a refining company. While PSX is currently one of the largest refining companies in the U.S. with current capacity levels near 2.2 million barrels per day, other business segments — such as chemicals — have grown in their importance to the company’s top and bottom lines.

In Phillips’ first-quarter earnings release, management noted that its chemicals and midstream businesses (transportation, NGL, DCP midstream) accounted for $258 million of the $611 million in total earnings over the period, with substantial earnings growth experienced in both channels year-over-year. PSX attributed the success of these segments primarily to higher volumes, lower operating costs, and improved margins.

Refinery Business Fundamentals Are Improving

As the primary revenue and earnings driver for PSX stock, investors pay close attention to both macro trends with the refining business as well as idiosyncratic drivers for Phillips 66 as compared with its competition.

We have seen oil prices depressed for some time. The crack spread (the difference between the input price of a barrel of crude and the output price of a barrel of gasoline) has been continued to trend downward cyclically over the past few years.

However, predictions for a better-than-normal driving season in the U.S. this year — along with the potential for oil prices to stabilize and trend higher over the medium-term — have inspired many investors to maintain confidence in the ability of the refining sector to continue to turn profits.

Recent earnings from Phillips’ refining operations during Q1 were promising ($259 million in Q1 2017 compared to -$38 million in the same quarter last year. While there was an adjustment made due to the consolidation of a MSLP petroleum coking venture, the numbers still were substantially higher than last year’s numbers, which also included a special-item gain.

Dividend and Share Buybacks Buoy Long-term Investors

The strength of PSX’s key businesses thus far in 2017 has led the company to raise its dividend yet again to 70 cents per share, representing a dividend yield at current levels of approximately 3.7%. Phillips 66 has raised its dividend seven times since inception in 2012, with a compound annual growth rate over that time of 30%.

Additionally, PSX has maintained its commitment to returning value to shareholders through stock buybacks in addition to its growing dividend.

This combination of stock buybacks and dividend distributions is a formula Mr. Buffett looks for in great long-term buy-and-hold companies with undervalued shares.

Bottom Line on PSX Stock

Phillips 66 is a well-diversified company in an industry that has been beaten up of late. With Warren Buffett maintaining his 16% stake in this company and PSX’s business model constantly diversifying and growing in segments other than refining, all signs are that outperformance is likely over the medium-term.

I remain very bullish on PSX stock, and believe that the shares of this business remain undervalued, making future share buybacks and capital appreciation more likely moving forward.

As of this writing, Chris MacDonald did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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