PSX

[Horace Cugle]

I think most of you guys are familiar with PSX or own it.

I was considering selling my shares of PSX. I accumulated them from the spinoff and a couple of small buys around $30 and $60. PSX is 2.8% of my portfolio. I’d use the proceeds to up my stake in TGT and WMT.

PSX hasn’t been a lot of fun to own the last few months, but the share price probably needed to settle down a little. So while I was happier when it was $65-$70, it’s still up 65% so who could complain? It just trades like the 2.0 beta stock that it is.

The dividend yield is 2.22% and they’ve raised the dividend from $0.80>>>$1.00>>>$1.25. The payout ratio is only 17%.

If (and I mean if) PSX becomes an annual dividend raiser and bumps the dividend up 20% for a while, I’m not so sure I want to sell a stock doing that. Five years of raises like that give it over a $3.00 a share dividend.

I know, a couple of “ifs” and pretty high expectations, but a $3.00 dividend would probably put it well over $100, and I’d end up with a 5.35% yield on cost at today’s price of $56. In other words, I can buy a future $3.00 dividend today for $56, but it’s an adjustable rate type thing that works in my favor with each dividend increase. All I have to give up is some initial yield. Who wouldn’t want to do that?

Well, an investor who demands maximum income NOW wouldn’t because he can’t wait 5 years for that to happen because he can’t accept the lower initial yield. Investors who don’t like higher beta stocks wouldn’t either. Or people who just hate anything to do with oil.

So I remind myself of what I’m supposed to be doing. While I could sell PSX and buy some higher yield for more current income, I’m still investing for the future and if anything, PSX might deserve more weight in the portfolio, not less. Just like I think TGT and WMT do.

What are the chances PSX can pull off some serious dividend growth? I don’t know but they appear pretty shareholder friendly and the parent COP is shareholder friendly. 17% payout ratio, PE under 8, PEG 0.8. EPS estimates have declined a little, probably already baked in the price.

If the economy ever gets moving I’d have to think the chances are reasonably good they could achieve dividend performance like that if that’s how their dividend policy shakes out. A couple more "ifs", but not really an unreasonable take on it. Or is it?

I'm going to think about that for a while. For now if I want more TGT and WMT, I’ll have to find something else to sell.

[EricL]

I own PSX and share some of your concerns about the lower current yield.

However, with their recent spin-off of mid-stream assets I think the dividend will likely be getting a boost in coming quarters. I plan on holding until next year to see how things shake out.

If nothing else, if you are sitting on a lot of gains you could trim your position back to a 2% (or whatever you are comfortable with) weighting and buy your TGT or WMT if you think they are at a good entry point.

[Kerim]

I only have 50 shares of PSX, which I got in the spin-off. I have no idea whether I would have bought them if not for the spin-off, but for all of the reasons you both have listed, I'm going to hang on to those shares. I am hopeful that we'll see some pretty hefty dividend raises going forward. The oil / energy sector is often going to be more of a roller-coaster ride than some other sectors, but can be worth it.

For what it is worth, although COP and PSX are separated in my spreadsheets, I often "mentally account" for them as still one unit, as it was when I first bought. In other words, to gauge how my initial COP investment is doing, I lump my COP and PSX together, informally. From that perspective, it was a darned good buy!

[Horace Cugle]

I have always looked at dividends as something that puts a floor under the stock, a buffer. While I'm not especially concerned with "only" a 2.2% yield, when yields get that low I don't think they hold the stock up as well because investors don't rush in to buy 2.2% yields like they would a 4% yield. Just my perception.

I do the same thing with COP and PSX. I set up a little widget on my spreadsheet that calculates them as one company. Just for fun I guess.

They announced their last raise from $1.00>>>$1.25 last February, I think it's wise to hang for a while and see what happens. There will probably be some bumps in the road, but as we near next February investors will get a little more interested.

It seems like at $56 it is reaching a 6 month support level, but don't put much faith in my divining of charts. Still, it's 20% off its high and in a zone that says pay attention.

Also, the formation of PSXP MLP is supposed to help PSX with earnings. I don't understand (or enjoy) all that accounting stuff, but that's what I've read.

All said and done, I can hardly think of a stock I've owned in the last 20-30 years that I wish I still didn't own. If an investor is worried about what PSX might be next month I wouldn't buy it. Longer term it could be a very nice stock to own.

[Horace Cugle]

I was reading the PSX transcript from the Barclays' energy conference. Of particular interest.....

"Moving on to distributions we believe that growing shareholder distributions create total shareholder return for our company. We think that dividends need to be bullet proof. You need to know that there is cure, you need to be able to see the runway that we have to increase that dividend with time, but we’ve always said in 10 years we’re going to look back and say we increased the dividend every year. You should expect that we’ll increase the dividend in 2013."

Like it's parent COP, PSX seems to be a very shareholder friendly company.

Some investors were really POed and dumped COP because they missed a dividend raise by one quarter and then only raised it 4.5%. I started buying COP back in 2010 when the dividend was $2.00, but accumulated the bulk of the position when the dividend was $2.20 Take a look at what they actually did for shareholders since the PSX spinoff.

When COP spun off PSX the dividend was $2.64 and COP kept the whole thing, and PSX started with an $0.80 dividend. 1 for 2 spinoff so a $0.40 raise / $2.64 = 15.15% raise. Then a 4.5% raise to $2.76 on top of that five quarters later. PSX's dividend went from $0.80 --> $1.00 --> $1.25 in just a few months.

If you held onto COP and your PSX spinoff shares you could look at it like this: $2.64 + ($1.25 / 2) + $0.12 = $3.385 = 28% raise in 15 months. And now they say expect another raise this year, and for the next 10 years! I'm really pissed!

A lot of investors dumped their PSX shares shortly after the spinoff (look at a chart); I can only guess to buy more yield. The stock has gone from $34 --> $70 and has settled back down in the $55-$60 range, about a 70% cap gain.

With regard to the dividends, I don't see anything to not be absolutely delighted about for either company, so far. Of course talking big and delivering it are two different things, and there are plenty of big talking CEO's out there. And COP needs to prove it's not going to be a low DG stock.

[Kerim]

Great post, Horace, and nice find in the PSX transcript. You're right that they have to walk the walk too, but some companies don't even talk the talk. I think it is reassuring.

I agree that we'll have to keep a close eye on what COP does with the dividend in the next year or two, but as you've said, keeping the dividend whole through the PSX spinoff was a pretty giant thing, and in my mind, buys them some leeway for a while.

As I mentioned in an earlier post, I still "mentally account" for my COP and PSX together to get an idea of how that investment decision (in COP before the spinoff) has played out. I bought 100 shares of COP for right about $60 in March 2012. $6000 invested and $264 in annual dividends. Now, about 18 months later, my 100 shares of COP are worth about $6900 and my 50 shares of PSX are worth about $2850. So my $6000 investment is now worth about $9750. Better yet, my $264 in annual dividends has grown into $338.50 -- a 28 percent increase in 18 months.

Not too shabby! (In fact, yet another "wish I'd bought more" situation!)

[Horace Cugle]

The part about the dividend was on page 9, I thought I'd never find it.

COP keeping the whole dividend was huge, I was pretty stunned when they laid that all out. Too good to be true is what I thought at the time. The 4.5% raise was a little disappointing but I looked at it like since it was unexpected, they must be doing all they can for shareholders in a transition year. And like you said when you add it all up you've done pretty well.

[ChadR]

Good job on hanging onto PSX. I unfortunately was one of the many that sold off PSX after the spinoff. At the time my reasoning was good. The huge run up caused the yield to be very low. Also, management was saying that the dividend raises was going to be 5%. With the yield under 2% and raises of 5%, it didn't fit my criteria for keeping it. Wish I would have waited for the first dividend was announced before making my decision to sell. All our investing decisions can't be right. At least I learned a lesson to be patient and see what the raise is before trusting management on what a future raise will be. I still have my COP shares and those I will be keeping.

[Horace Cugle]

Don't feel bad a lot of guys dumped PSX for more yield. I don't remember any talk about 5% dividend increases. I would have held the stock regardless but 5% doesn't get me excited, 2 - 25% raises in a year does. I'm a believer, and it appears they have plenty of room for a nice increase. We'll see what happens when it comes raise time.

[ChadR]

The 5% raise talk was either right before or right after the split. Patience was not a virtue for me at this time.

[EricL]

Boom!

25% increase to quarterly dividend!

Quote:“Our objective is to consistently increase shareholder distributions, while also capturing attractive opportunities to reinvest in our businesses and grow future returns," said Phillips 66 Chairman and CEO Greg Garland. “Returning capital to our shareholders remains a priority for Phillips 66, and we are pleased to deliver another increase in our quarterly dividend.”

Forward yield of 2.64% at current price. I guess the spinoff of midstream assets is working to juice the yield as I had hoped.

[Horace Cugle]

Beat me to it! This makes three 25% increases in 17 months, and now the yield will fall into more investors acceptable range. It has certainly been a nice ride so far.