PSX Stock: This Is Why Warren Buffett Bought $800 Million Phillips 66
This Stock Has a Great Track Record
Not surprisingly, Warren Buffett bought $800 million of PSX stock because Phillips 66 (NYSE:PSX) has solid potential in this market. Lower fuel prices mean greater consumption after all.
Phillips 66 is a midstream energy operator that was a spin-off from ConocoPhillips (NYSE:COP). It was spun off a few years ago.
At the time, it was an absolute gift to holders of COP stock, though in hindsight, ConocoPhillips probably should have held onto the asset. It would have been a real help with its corporate earnings in today’s low oil price environment.
Phillips 66 operates three main businesses: hydrocarbon refining and marketing, midstream processing and delivery, and chemicals.
Last year, the company operated some 15 refineries with a net crude oil capacity of around 2.2 million barrels per day. The company also boasts some 15,000 miles of pipeline capacity and approximately 10,000 outlets that are selling its product.
In a low price environment for gasoline and related commodities, business for Phillips 66 is pretty good right now.
Since being spun off from ConocoPhillips, PSX stock has done well.
Chart courtesy of www.StockCharts.com
Institutional investors, like Warren Buffett, own PSX stock. The position currently offers a solid dividend yield and it’s not as expensively priced as other large-caps.
In many ways, it’s the perfect Warren Buffett-type of company. Perhaps the entire position will get bought out someday.
In any event, Phillips 66 is very much a growing business in this weak commodity price environment. And when oil and gas prices turn (it may take another couple of years), the initial margin gap should turn out to be a boon to earnings.
Currently, Wall Street doesn’t actually expect any growth in Phillips 66’s 2016 fiscal year. But there is a consensus that fiscal 2017 is going to be a double-digit-growth year for the company in terms of its sales and earnings.
Like many of Warren Buffett’s businesses, accumulating shares in a company like Phillips 66 is a long-term play in both dividend growth and capital gains potential.
Practically, a pick like Phillips 66 stock is an excellent candidate for automatic dividend reinvestment by those shareholders who don’t require the income for other purposes.
In a slow-growth world, automatic dividend reinvestment is what I believe to be an excellent investment strategy. Over time, those dividend payments add up. Eventually, more dividends equal a lot more shares, which equals a lot more dividends. Essentially, your total return can really accelerate at a much greater rate than the simple change in a company’s share price.
Even for growth stock investors in this environment, which is a very slow-growth world with the potential for the next U.S. recession, dividend income is crucial.
It’s the reliable businesses (and dividend payers) that take equity investors through the tough times. This doesn’t mean that good stocks don’t experience material price corrections because we know this isn’t the case.
But the dividend payments matter in an environment where top-line sales growth is a difficult thing for a large-cap company to achieve.
Here’s the Bottom Line on Phillips 66 Stock
Not every investor wants to be in the oil business, but it does offer good income payments.
Most of the energy sector is experiencing its own business cycle recession due to the dramatic drop in oil and natural gas prices.
But Phillips 66 is the exception and what a company like PSX stock offers is a solid package of attributes that should benefit shareholders dearly over the near-term in this low price environment for gasoline.
As mentioned, Phillips 66 is an excellent potential candidate for long-term, automatic dividend reinvestment.