Please ensure Javascript is enabled for purposes of website accessibility

This High-Yield Stock's Strategy Keeps Paying Dividends

By Matthew DiLallo - Feb 1, 2020 at 4:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Phillips 66 Partners' organic expansion program is growing its earnings and cash flow, supporting continued dividend increases.

Phillips 66 Partners (PSXP) has shifted its strategy over the past few years from acquiring assets from its parent Phillips 66 (PSX 1.34%) to developing organic expansion projects. That pivot is paying off, which was evident in the company's fourth-quarter results. Those numbers put the company's 6%-yielding payout on a rock-solid foundation. Meanwhile, with more growth coming down the pipeline, that payout appears poised to continue growing.

Drilling down into Phillips 66 Partners earnings

Metric

Q4 2019

Q4 2018

Year-Over-Year Change

Adjusted EBITDA

$345 million

$309 million

11.7%

Distributable cash flow

$254 million

$223 million

13.9%

DCF per unit

 $1.11

 $1.16

(4.3%)

Distribution coverage ratio

1.27

1.39

(8.6%)

Data source: Phillips 66 Partners. 

As that table shows, Phillips 66 Partners' earnings and cash flow both rose double-digits compared to the prior-year period. The main factor fueling that growth was the completion of three expansion projects: the Bayou Bridge pipeline extension, the Lake Charles isomerization unit (which converts byproducts into useable feedstocks to make motor fuels), and the Lake Charles pipeline. 

While the master limited partnership's cash flow surged overall, it declined on a per-unit basis. That's entirely due to a transaction with its parent to eliminate the incentive distribution rights -- which are costly management fees -- that it was paying to Phillips 66. Its parent agreed to extinguish these rights (which will save Phillips 66 Partners money over the long term) in exchange for additional units in the MLP.

Even with the added units, Phillips 66 Partners generated enough cash to cover its high-yielding payout -- which it has increased by 11% over the past year -- by a comfortable 1.27 times during the quarter. The MLP also ended the quarter with a strong balance sheet, backed by a low 2.9 debt-to-EBITDA ratio, well below the sub-4.0 target of most MLPs. Those two metrics, when combined with the company's stable cash flow profile since long-term fee-based contracts provide all its earnings, put its high-yielding payout on a firm foundation.

Hundred dollar bills with the word dividend on a piece of paper.

Image source: Getty Images.

What's ahead for Phillips 66 Partners?

Phillips 66 Partners' growth engine is about to shift into another gear in 2020 thanks to the upcoming completion of several more expansion projects. Leading the way is the 900,000-barrel-a-day Gray Oak Pipeline, which it started up in November and should reach its full capacity by the second quarter. The MLP owns a 42.25% stake in this $2.7 billion pipeline project, making it a needle-mover for the company.

That pipeline will transport oil produced in the Permian Basin to destination points in Corpus Christi, Texas, including the South Texas Gateway Terminal that's under construction. Phillips 66 Partners holds a 25% interest in this $625 million project that should come online in the third quarter.

Meanwhile, the company has two smaller, wholly owned projects under construction that should start up later this year. It's investing $80 million to expand the capacity of the Sweeny to Pasadena Pipeline as well as storage space at the Pasadena Terminal that should both come online in the second quarter. Finally, it's spending $150 million on increasing the storage capacity at Clements Caverns, which it expects to finish by the fourth quarter.

Phillips 66 Partners is also investing $335 million to build the C2G pipeline, which should start-up by the middle of next year. Meanwhile, it budgeted funds to participate in the expansion of the Bakken Pipeline. As these projects come online, they'll provide Phillips 66 Partners with additional sources of steady cash flow that it can use to continue growing its distribution to investors. 

An excellent income growth option

Phillips 66 Partners has done an exceptional job expanding its cash flow so that it can support steady increases in its high-yielding distribution. Overall, the MLP has raised its payout for 25 consecutive quarters. That trend appears likely to continue in 2020, given all the growth it has coming down the pipeline from its current slate of expansion projects. Add that to its strong financial profile, and Phillips 66 Partners is an ideal option for dividend investors.

Matthew DiLallo owns shares of Phillips 66. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Phillips 66 Partners LP Stock Quote
Phillips 66 Partners LP
PSXP
Phillips 66 Stock Quote
Phillips 66
PSX
$83.76 (1.34%) $1.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.