Dividend Safety Analysis: Phillips 66 (NYSE:PSX)
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Phillips 66’s dividend and fundamental data charts can all be seen by clicking here.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
Phillips 66’s Dividend Safety Score is 48, which indicates that the safety of its current dividend payment is about average.
The company’s payout ratio has increased since it started paying dividends in 2012.
Source: Simply Safe Dividends
Thanks to the most recent poor performance from its refining segment, the trailing 12-month EPS payout ratio has increased to 41%, which still provides a nice safety cushion for the payout despite the cyclicality of the refining industry.
Investors can further take heart that the upcoming quarters may see refining margins improve, thanks to refiners cutting back on capacity in face of the gasoline glut, and its commensurate lower margins.
Another protective backstop for the dividend is the company’s strong balance sheet, which holds $2.2 billion in cash. That alone is enough to pay the current dividend cost for nearly two years.
The company’s total debt load could also be covered using cash on hand and less than 1.5 years’ worth of earnings before interest and taxes (EBIT).
It’s no wonder why Phillips 66 maintains investment-grade credit ratings from S&P (BBB+) and Moody’s (A3). These ratings help keep borrowing costs low, reducing the refiner’s cost of capital and helping keep profitability high.
With over $7 billion of available liquidity as well, the company is in a good position to execute on its growth projects while continuing to pay dividends.
Source: Simply Safe Dividends
The company’s conservative management has been extremely careful to ensure that Phillips 66 doesn’t take on an excessive amount of debt.
Given the volatile nature of the refining business this is very good news for investors, as is the fact that the company can easily service its interest payments even in today’s difficult refining environment.
Phillips 66’s Dividend Safety Score is primarily being lowered by recent business results. As I mentioned above, the slip in refining margins is hurting growth.
The company’s sales have declined by at least 20% year-over-year for six straight quarters, and future commodity trends are very difficult to forecast.
Source: Simply Safe Dividends
Overall, Phillips 66’s dividend payment looks quite safe today. The company’s strong balance sheet should help it weather the current energy storm while providing flexibility to continue returning capital to shareholders and investing for growth. PSX’s payout ratio also looks reasonable, and the company’s strong returns on invested capital highlight its underlying quality.
