Investment Review - Phillips 66 $PSX

I've been investing in individual companies for over a decade now.  Honestly, it still seems like just a few years ago that I nervously made my first purchase of an individual stock.  

I've made plenty of good decisions as well as some poor ones, but anyone that bats 1.000 in investing is lying to you.  

In case you don't know I consider myself a long-term dividend growth investor, i.e. when I buy I'm owning for years.  As such I believe that it's good to occasionally review your investments as well as their results.

While I do these reviews internally, I felt that it was probably best to share my thoughts on my investments as a way of thinking out loud.  Over time I plan to recap my investments that have at least 5+ years since the date of my first investment in order to see what's gone right or wrong.

Overview

Technically I never purchased shares of Phillips 66 (PSX) as the shares were received as part of a spin-off from ConocoPhillips (COP).  However, that doesn't mean that Phillips 66 hasn't been a great investment.  My biggest regret is that I didn't have a larger stake in the business.  That's a bit of a theme with some of my earliest investments and a lesson that I finally learned later.

As highlighted in my EOG Resources investment review the oil market has been quite volatile over the last decade or so.  While Phillips 66 is no stranger to that volatility it has been more muted than the E&P or upstream side of the market.  That's because Phillips 66 primarily makes their money through the refining of source material into various products.  

As such they operate as more of a spread type business where they make profits if for every barrel of oil they refine they are able to sell the combined various products for more than it costs plus the expenses to refine it.

Dividend History

Phillips 66 has rewarded shareholders with very strong dividend growth since becoming a separate entity in 2012.  The very first dividend payment they made was for $0.20 per share per quarter and the most recent payment was $0.97.  That's good for a 385% gain between September 2012 and September 2022.  

Phillips 66's dividend growth hasn't been the most steady; however, being tied to the commodity markets to some extent I would expect to see a bit less consistency compared to something in the utilities or consumer staples space.

Shares of Phillips 66 currently offer a dividend yield around 4.4%; however, thanks to dividend growth and time my yield on cost is 11.75%.  In other words as long as Phillips 66 is able to at least maintain the current dividend payment I'm able to receive nearly a 12% annual return.  Not bad at all!

Investment History

I first purchased shares in ConocoPhillips in September 2011 and then again in October 2011.  Phillips 66 began trading on April 12, 2012.  For the purposes of the returns I'll be using April 12, 2012 as the date of purchase as well as the purchase date for the reinvested dividends for the shares received from the spin-off.  

I'm also considering the cash received in lieu of fractional shares as a dividend payment, although it really isn't it was just a cleaner and easier way to handle it.  

The purchases netted me 7.855 shares with a total basis of $241.70.  I've since reinvested 11 dividend payments that added a total of 0.602 shares with a total basis of $37.50 bringing my total position up to 8.457 shares.  Don't judge me on the small position it was a lesson I did eventually learn.

I've also received 33 cash dividend payments, including the cash in lieu of fractional shares, which have totaled $203.11.  

Dividend Payback

During the time I've owned Phillips 66 I've received a total of $203.11 in cash dividend payments, with an additional $37.50 being reinvested.  That $37.50 in reinvested dividends is now worth $52.99. 

In just cash dividends my Phillips 66 investment has an 84.0% payback compared to the capital I've invested.  Including the dividends that were reinvested, but not what those additional shares are currently worth, gives a payback of 99.5%.  

Adjusted Basis & Returns

My per-share basis started at $30.25 once I received shares from the spin-off.  Thanks to the reinvested dividends and the cash dividends paid along the way my adjusted per-share basis is down to just $9.00, 70.2% lower than when I first purchased shares.

What's really cool is that if Phillips 66 can at least maintain the current $3.88 annual dividend for the next 9 or so payments I'll effectively own my stake at a $0 cost basis.  

The following chart shows my investment history with Phillips 66.  It's a pretty simple chart since there has been just two purchases of shares and just a handful of reinvested dividends.

The pink cumulative cash dividends is definitely a nice looking part of the chart.  Steadily climbing payment after payment.  Of course that pesky capital gain/loss has fluctuated much more.

The following chart shows the total return that I've received from my Phillips 66 investment.  

Total returns have been erratic as to be expected given the changes in investor sentiment.  By late 2018 total returns were up to just a shade under 350%; however, during 2020 they gave up a good chunk and were back to just 164%.   

Currently my total returns are at a 292% gain.  I'm definitely not complaining about that especially since I fully expect dividend growth to continue which will just juice those returns even more.

Based on the timing and sizes of cash flows, my Phillips 66 investment has provided a 16.0% IRR across nearly 10.5 years.  That's a solid return and has actually beaten the S&P 500 Total Return Index (SP500TR).  The same cash flows invested into SP500TR would have generated a 13.1% IRR over that same time.  I beat the market on this one!

Lessons Learned

I'm very happy with my past self for having a stake in Phillips 66 and holding on.  Of course a larger stake definitely would have been nice.  That was a lesson that I eventually learned and one that I'm continuing to learn as I try to really build up the sizing of my positions.

Overall Phillips 66 has been a pretty solid investment.  It's hard to complain about reaching nearly a 12% YOC especially since we're approaching a 100% dividend payback too.  Especially since capital gains have been strong as well.

Looking ahead I would expect Phillips 66 to still be volatile as they are still a commodity-adjacent business.  So some lumpiness to returns are to be expected.  

Have you received a 100% dividend payback from any of your companies?  What about a >10% YOC for any of your positions?

*Returns calculated through closing price on September 9, 2022