Showcasing strong cash flow generation, portfolio holdings Union Pacific (UNP) and Phillips 66 (PSX) have issued new buyback programs recently. On November 21, Union Pacific announced a new share repurchase authorization of up to 60 million common shares by 2017. The new four year authorization allows for the repurchase of roughly 13% of current shares outstanding. On December 6, Phillips 66 approved a new $2 billion share repurchase program. Since the third quarter of 2012, Phillips 66 has authorized a total of $5 billion in share repurchases and has increased dividends from $0.20 per share to $0.39 cents per share on a quarterly basis. Though we tend to prefer immediate dividend growth instead of buyback initiatives for most dividend growth portfolio holdings, the moves speak to the strength of their respective dividend coverage via cash flow. We hold Union Pacific in our Best Ideas portfolio.
Valuentum’s Take
At the time of this writing, the Valuentum Dividend Cushion scores for Union Pacific and Phillips 66 were 1.9 and 2.8, respectively. Said differently, Union Pacific can cover its cash dividend payments (including growth in them as forecast in the dividend report) 1.9 times with free cash flow (CFO less capex) over the next five years, after considering its capital structure. Phillips 66 can cover its cash dividend payments (including growth in them as forecast in the dividend report) 2.8 times with free cash flow (CFO less capex) over the next five years, after considering its capital structure. These are fantastic dividend coverage ratios.
From an economic value standpoint, we think the buybacks are essentially value-neutral as each firm is trading at roughly fair value. We like firms in our Dividend Growth portfolio that show both (cash-flow) capacity and (management) willingness to continue raising their dividends long into the future. We don’t expect to put new money to work in Union Pacific or Phillips 66, but we continue to be encouraged by the shareholder-friendliness of both management teams. Union Pacific and Phillips 66 yield 2% and 2.3%, respectively.