Phillips 66 Partners (NYSE:PSXP) has flown under the radar of most dividend investors over the years. One of the factors overshadowing the energy company is all the turbulence in that sector due to the continued volatility of oil and gas prices. On top of that, the master limited partnership (MLP) has also stood in the shadow of its parent, refining giant Phillips 66 (NYSE:PSX), which is an excellent income stock in its own right.
Phillips 66 Partners, however, has all the makings of a great dividend stock. Here's why.
A rock-solid payout
Phillips 66 Partners currently pays its investors an attractive distribution that yields 6.2%. The company backs that payout with a top-notch financial profile. For starters, it generates steady income supported by long-term contracts with customers like Phillips 66. Because of that, Phillips 66 Partners has minimal exposure to commodity price volatility, with most of its agreements having minimum volume guarantees where customers pay it even if they don't use the capacity.
The MLP complements its steady cash flow profile by having conservative financial metrics. During the third quarter, for example, it generated enough cash flow to cover its high-yielding payout by 1.29 times, which is above the 1.2 times comfort level of most MLPs. Meanwhile, its leverage ratio was 3.2 times its debt-to-EBITDA, which was well within the less-than-four-times target level of its peer group. Because of that, the company's payout looks like it's on solid ground.
A long history of growth, with plenty of fuel to keep going
One factor that sets apart the best dividend stocks is that they have consistently increased their payout. That's because companies that routinely give their investors a raise have historically outperformed their stingier peers by a wide margin.
Phillips 66 Partners has excelled in this area. It has now boosted its distribution to investors every quarter since its initial public offering (IPO) in 2013, recently notching its 24th consecutive quarterly increase. That steady growth has given Phillips 66 Partners the fuel to outperform. Overall, it has generated a 141% total return since its IPO, which has outpaced the S&P 500's nearly 110% total return over that time frame.
That consistent distribution growth should continue. That's because the company has several expansion projects coming online. The biggest is the $2.7 billion Gray Oak Pipeline. It owns a 42.25% stake in the system, which will transport oil from the Permian Basin to the Gulf Coast. Phillips 66 Partners is in the process of commissioning that project, which should start full service during next year's first quarter.
The company has four more projects under construction, which should start up through the middle of 2021. As they do, they'll supply the company with a growing stream of steady cash flow, since long-term contracts back each one. Add that rising cash flow to Phillips 66 Partners' strong financial profile, and it should have no problem continuing to increase its payout each quarter for at least the next couple of years.
Meanwhile, the company should be able to find new fuel sources to keep growing beyond 2021. Several factors drive that view. For starters, it will likely continue securing high-return organic expansion opportunities thanks to its relationship with Phillips 66. One that's already in the pipeline is a project to roughly double the capacity of the Bakken Pipeline System. Acquisitions represent another growth driver. Phillips 66 still owns several midstream assets that its MLP could acquire to boost its cash flow in the future. In addition to that, Phillips 66 Partners could also buy assets from third parties. With a top-notch financial profile, Phillips 66 Partners has plenty of flexibility to invest in opportunities that will grow its cash flow in the coming years.
Phillips 66 Partners has all the makings of dividend greatness
Phillips 66 Partners currently pays its investors a well-supported, high-yielding distribution, making it an attractive option for income-seekers. Add that to the likelihood that the company can continue growing its payout in the coming years and it's an excellent stock for dividend investors.