Dividend Growth Newsletter portfolio holding Phillips 66 (click ticker for report: ) released positive news Friday. The refiner will raise its dividend 25% to $0.3125 per share beginning in the first quarter of 2013, and it also approved an additional $1 billion of share repurchases.
Phillips 66 has been a standout performer since being distributed to shareholders of ConocoPhillips (click ticker for report: ) earlier this year, with the stock up nearly 65%. Refining has traditionally been one of the more volatile businesses of the oil and gas segment, and Phillips 66 has capitalized on a favorable cycle by generating strong earnings growth and solid cash flow. Refinery and marketing profits more than doubled during the firm’s most recent quarter, and current market conditions (a lack of refinery supply) suggest the company should continue to grow earnings into 2013.
Though we believe shares are fairly valued, there is some modest valuation upside in shares (based on the high end of our fair value range). The firm’s new $1 billion buyback could help propel shares towards its intrinsic value, but we would prefer the company increased its dividend given the current equity valuation. Buying back fairly valued stock is value-neutral, while buying back overvalued stock is value-destructive.
Since the firm scores a 5 on the Valuentum Buying Index (our stock-selection methodology), we are hesitant to put new money to work in the company at this time. However, we would not be surprised to see shares appreciate from current levels. As long as cash flow generation remains strong, we think Phillips 66 could continue to increase its dividend.