Phillips 66 Total Yield Value Proposition Is Very Attractive
On Oct. 4, 2019, Phillips 66 (NYSE:PSX) announced that it would repurchase up to $3 billion on its common stock shares. Combined with other statements that management has made, plus its recent history of buybacks, I estimate that PSX will buy back about $1.5 billion or so per year. Given PSX stock’s $46 billion market value, this means its buyback yield is 3.3%. Added to the 3.5% dividend yield, PSX stock has a total yield of 6.8% total yield. Total yield is the total of return of capital payments made on behalf of shareholders, including dividends and buybacks, all divided by the stock’s market value.
PSX management stated that it plans on spending 60% of operating cash flow (not free cash flow) on capital expenditures and 40% on a combination of dividends and buybacks:
Recent Share Buybacks History And Policy Statements
That’s interesting. PSX didn’t really follow that 60/40 split in its most recent six months ending June 30. You can see this in the following extract from the cash flow statement:
Source: PSX 10-Q ending June 30, 2019
In the past six months, PSX spent $1.569 billion on buybacks and dividends, including $799 million on buybacks. But operating cash flow was only $1.452 billion. So, it spent more than 100% on shareholder returns.
But, on the other hand, during the Q2 conference call, management said it plans on spending $1.5 billion to $2.5 billion per year on share buybacks. Here is a portion of that statement:
Source: Q2 2019 earnings call transcript
This estimate is also reinforced by slides 33 through 36 of the recent slide presentation by PSX on August 7, 2019, concerning its capital allocation and expected FCF:
These slides show that PSX expects to produce about $5.5 billion in free cash flow (“FCF”) over the next year. Of this amount, it expects to spend $1.6 billion on dividends and between $1.5 and $2.5 billion on share buybacks.
If PSX spends $2.0 billion on buybacks, the buyback yield is 4.34%. That brings the total yield to 7.8%. If PSX spends $2.5 billion on buybacks, the buyback yield is 5.43%, and the total yield becomes 8.9%. These are very attractive returns to shareholders.
Total Shareholder Returns
PSX has a slide in its August Investor Update which shows its history of total shareholder returns since 2012. By this, PSX means the combination of both dividend yields and stock price performance:
This shows that its total shareholder returns have been over 280% in the past 7 plus years. That works out to about a 15.8% annualized compound return. This is significantly higher than its peers and the S&P 100 (143% over 7 years or about 5.5% compounded annually).
Bottom Line – PSX Stock’s Total Yield Is Attractive
Phillips 66 has a great history of paying consistent dividends and buying back stock. Over the past 5 years, PSX has increased its dividends on average 11.6%. So, combined with its present 3.5% dividend yield, the prospective buyback yield could have a wide range.
For example, with buybacks of 3.3% of the market value (if just $1.5 billion in stock is bought back per year) to as high as 5.43% (if $2.5 billion of shares are repurchased), PSX’s total yield could range from 6.8% to as high as 8.9%. Including dividend increases averaging 11%+ over the next five years, as in the past, shareholders would get an even higher total yield return.
In the past seven years, PSX has provided total returns to shareholders over 15% per annum, including dividends, buybacks, and stock price performance. Total shareholder return includes not only payments made on behalf of shareholders (i.e., total yield), but also the performance of the stock that has been subject to buybacks. With PSX’s newly announced $3 billion share repurchase programs, those total shareholder returns are highly likely to continue over the next five years.
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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.