5 Reasons Phillips 66 Is Truly Built to Last
Earlier this year, legendary investor Warren Buffett bought 27-million shares of Phillips 66 (NYS: PSX) , an independent downstream energy business with refining, marketing, and chemical operations, for the holdings of Berkshire Hathaway (NYS: BRK.A) . Up more than 40% over the last six months, Phillips 66 has healthy valuations with a robust dividend that should appeal as much to the Foolish investor as it did to Buffett.
Gotta love the economic moat
Phillips 66 has a wide economic moat. Buffett once stated: "In business, I look for economic castles protected by unbreachable 'moats.'"
Let's let the numbers do the talking here: Phillips 66 has 15,000 miles of pipeline systems; 10,000 branded marketing outlets; 15 refineries with a net crude capacity of 2.2-million barrels a day; and the capacity to process 7.2-billion cubic feet of natural gas daily. Phillips 66 is dominating the chemicals and midstream segments against industry rivals, as the chart below reveals. The cash generated from these high-margin units will serve to broaden the economic moat of Phillips 66. 'Nuff said about the economic moat of Phillips 66.
Mark West Energy Partners
Enterprise Products Partners
Refining and Marketing
Source: Phillips 66 Website; *2012 year to date return on capital employed
Still way undervalued
Buffett also looks for companies with undervalued assets. Even with the recent run-up in its stock price, Phillips 66 still has compelling valuations. The price-to-sales ratio, which shows how much each dollar of sales costs in the share price, and price-to-book ratio, which reveals how the assets are valued by Wall Street in the share price, both compare favorably with the industry average and competitors such as Exxon-Mobil (NYS: XOM) , Chevron (NYS: CVX) , Occidental Petroleum (NYS: OXY) and BP (NYS: BP) .
Great cash flow yields a growing dividend
The "intrinsic" value of a company, the net present value of all estimated future cash flows, is also critical for Buffett. The cash flow and dividend yield, particularly the growth elements, are enticing for Phillips 66. With such a low dividend payout ratio, Phillips 66 has ample cash flow to increase its dividend in the future or initiate stock buyback programs. Just last month, Phillips 66 announced a 25% dividend hike.
Price to Cash Flow
Dividend Payout Ratio
No "dot-com" after Phillips 66
Basic industries have always appealed to Buffett. He ignored the dot-com boom, which only proves his brilliance as an investor (again). He has loaded the portfolio of Berkshire Hathaway with solid industry holdings that deliver high profits, not high style. Recent buys of his include Lubrizol, a chemical additives company, and Burlington Northern Santé Fe, a major railroad in the United States. Phillips 66 fits right into the Berkshire Hathaway portfolio with the other basic industry investments of Buffett's that will never go out of fashion.
Phillips 66 has a great future as a downstream energy company with its concentration on high-margin operations. There are many other energy plays with very promising futures, too. For three of the best, look no farther and check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this very valuable report by clicking here.
The article 5 Reasons Phillips 66 Is Truly Built to Last originally appeared on Fool.com.Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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