This Remarkable Energy Company has Doled out $43 Billion in Cash to Shareholders since 2012, with Further Cash Returns Anticipated in 2025 and Beyond.
Phillips 66 (PSX with a 1.47% increase) has demonstrated exceptional performance in returning value to shareholders since its separation from ConocoPhillips in 2012. As a comprehensive downstream energy company, it has returned an impressive $43 billion in cash to its shareholders over the last decade, which is more than double its initial market capitalization.
This energy company is in a strong position to continue producing and re-distributing cash to its shareholders. Let's explore the reasons.
A Capital Generation and Distribution Powerhouse
Phillips 66 stands out among its competitors in the energy sector. It is well-known for its downstream services, such as refining and retail, but its business also includes midstream facilities (like transportation, storage, terminals, and more), chemicals, and renewable fuels operations. This integrated approach yields higher returns with reduced volatility compared to specialized or fully integrated companies with exploration and production operations (like ExxonMobil). This distinctive approach allows Phillips 66 to generate high returns on new investments and generate lower-volatility cash flows.
The company has aggressively invested to expand its non-refining operations and generate less volatile cash flows. It has emphasized organic capital projects and strategic acquisitions to amplify and diversify its earnings capabilities. This strategy has placed the company on track to increase its annual earnings capacity from $7 billion to $14 billion by 2025, compared to its 2022 level. This growth should lead to a more than 50% increase in cash flow from operations (from $7 billion to over $10 billion), providing additional cash for dividends and share buybacks.
In 2022, the company set a goal to distribute $13 billion to $15 billion in cumulative cash to its shareholders by year's end. If the lower end of this target is achieved, it will bring the total cash distributed to shareholders since 2012 to $43 billion.
Phillips 66 has delivered these cash returns through a mix of dividend increases and share repurchases or exchanges. It has boosted its dividend every year since 2012, uplifting the payout at an impressive 16% compound annual rate, including a 10% increase earlier this year. Furthermore, it has purchased 34% of its outstanding shares, including an impressive 7.2% over the past year.
All Set to Enhance Cash Production and Distributions in 2025
Phillips 66 anticipates a significant surge in performance in 2025. The company is projected to reach its mid-cycle goal of $14 billion in earnings, while its cash flow from operations is expected to rise over $10 billion.
The company is set to invest about $2.1 billion of its cash flow in sustaining (roughly $1 billion in projects) and growing (around $1.1 billion) its operations. Notable growth projects include bolstering its natural gas liquids wellhead-to-market strategy, enhancing capital projects at its refining operations, and optimizing its Rodeo Renewable Energy Complex outside San Francisco. In addition, the company anticipates its joint ventures to invest another $560 million into growth-oriented projects. These growth-focused investments will result in higher earnings and cash flow in 2025 and beyond.
This capital budget represents a slight decrease from this year's level ($2.2 billion). Consequently, Phillips 66 is poised to generate even more free cash flow in 2025. Moreover, its cash reserves are growing. The company recently agreed to sell its 25% interest in the Gulf Coast Express Pipeline for $865 million. This transaction brings the company's total value of non-core asset sales over $3 billion, further strengthening its already robust balance sheet, which features a robust credit rating, low leverage ratio, significant liquidity, and a balanced debt maturity profile.
With its cash flow set to rise and its balance sheet solidifying even more, Phillips 66 is in an ideal position to continue delivering substantial cash returns to shareholders in 2025. It will likely grant its investors another substantial dividend increase. Additionally, the energy company will continue buying back a significant portion of stock. It could distribute more than $5 billion in cash to shareholders in 2024, given its ambition of returning more than 50% of its cash flow from operations, which is projected to climb to $10 billion in 2025.
The Complete Package
Phillips 66's strategy of investing to become a more diversified downstream company has resulted in substantial gains for its shareholders. It has significantly increased its earnings capacity while lowering the volatility of its cash flows. As a result, it has been able to re-distribute a considerable amount of cash to investors, which should continue in 2025 and beyond. These qualities make it an attractive choice for investors looking for a lower-risk investment option within the energy sector.
Phillips 66's strategic investments in expanding its non-refining operations are expected to further boost its cash flow, potentially allowing for an increase in dividends and share buybacks. By 2025, the company aims to distribute over $5 billion in cash to its shareholders, building upon the $43 billion returned since its separation from ConocoPhillips in 2012.
With its robust balance sheet, strengthened by asset sales and a solid credit rating, Phillips 66 is well-positioned to continue investing in its operations and returning significant value to its shareholders in the future.
