It’s been a rough month for Texas-based energy firm Phillips 66 (NYSE:PSX). The coronavirus from China coupled with an oil price war has sent shares of PSX stock more than 50% lower in just 1 month. But some bulls say the market sell off has created an entry point for value investors that could pay off immensely once the market picks back up.
Every stock comes with some risk, and Phillips 66 is no exception. However the firm’s solid management and financial strength make it too good to pass up at just $43 per share.
Here’s a look at the bull case for Phillips 66.
PSX Stock’s Dividend is Safe
One of the big reasons investors are willing to wait out turbulence in the energy sector is dividends. Oil and gas companies offer some of the juiciest dividends on Wall Street and PSX stock is no exception. The firm’s dividend yield has climbed to 8.55% adding some cushion for investors.
But a big worry among dividend investors is whether or not dividends will continue to be paid as pressure on the economy ramps up. Big name firms like Boeing (NYSE:BA) and Delta Airlines (NYSE:DAL) have already suspended their dividend payments — so is Phillips 66 next?
Unlikely based on the firm’s financials. Phillips 66 carries $11 billion worth of long-term debt which translates to a debt to equity ratio of 45%. That’s not bad compared to the wider industry. Plus, the firm’s dividend payout ratio of 50% suggests Phillips has plenty of cash to cover dividend payments even if times are tight.
On top of that, management confirmed the security of its dividend payments on Tuesday when CEO Greg Garland said in a statement, “We are taking action to maintain our financial strength to ensure security of our dividend, execute capital growth projects that are near completion, and maintain our strong investment grade credit rating.”
That brings me to the next argument for Phillips 66: the company is well-managed. In February the firm sold its stake in the Liberty Pipeline development, cutting out $800 million worth of construction expenses. This week management announced that it would cut spending by 18% this year, bringing total spending down to $3.1 billion.
That’s important for investors for a few reasons. The first is that Phillips 66 will likely have the funds it needs to continue rewarding investors while still investing in its business. Troubled times make for huge opportunities for those businesses with enough cash to take advantage of them.
This is one of those times. Not only will the company have cash to conduct stock buybacks, but it will also have the money to invest in growth at a time when others are struggling to stay afloat.
The other bright light for Phillips 66 is its refining business. The slump in oil prices is bad for the sector overall, but it’s worth considering that refined products tend to see a jump in demand when oil prices are low. Back in 2015 when oil price lost more than half of their value, Phillips 66 was able to outperform because its refining business generates nearly half of its total earnings.
This time around, coronavirus will probably keep a lid on demand for refining products somewhat — but its unlikely to evaporate completely.
The Bottom Line on PSX Stock
You can’t time the bottom of the market with certainty and most agree that there’s more volatility to come in the weeks ahead. However, investors should be starting to put together a buy list of strong companies that are trading at a discount due to the coronavirus pandemic and the oil price decline.
Phillips 66 should be on that list. The firm doesn’t come without risk, oil has been volatile for the past few years and there are still quite a few headwinds on the horizon for the industry as a whole. However, the stock looks like a strong play in the energy sector because of its financial stability and strong growth prospects.
Plus, Phillips 66 comes with a dependable, hefty dividend that’s hard to find anywhere else on the market right now. With turbulence likely to continue taking investors on a roller coaster ride, a stable dividend adds a layer of protection. PSX stock hasn’t traded this low since 2012, giving investors a chance to upgrade their portfolios with a quality stock at a bargain price.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.