Phillips 66 (PSX) produced impressive Q1 earnings on May 3 with good margins and prospects going forward. Given its 5.68% buyback yield and its 4.5% dividend yield, PSX stock is very attractive to value investors with a 10%+ total yield
Moreover, the midstream chemicals and oil refinery company said it ran its 11 refineries at 93% of capacity in Q1 and plans on running them in the mid-90% range in Q2. That means its operating cash flow will continue to be strong going forward. This makes the stock very attractive to investors.
For example, operating cash flow came in at $1.199 billion for the quarter - 5.5% higher than last year. That financed the company's ample dividend payments of $4.20 per share which cost $486 million for the quarter. This also means that PSX stock, trading at $92.31 on May 4, gives investors a 4.55% dividend yield.
Massive Buybacks
Moreover, Phillips 66 bought back $800 million of its shares during the quarter and is likely to do at least $4 billion this year. For example, management told investors on the conference call it had funded $3.7 billion in buybacks and dividends since July 2022.
In addition, it expects to fund $10 billion to $12 billion over the 10-quarter period between July 2022 through year-end 2024. That is an average of $1.1 billion quarterly or $4.4 billion annually. After subtracting $1.944 billion due to the dividend cost (i.e., $486 million x 4), its expected buybacks will be about $2.5 billion annually.
That implies its buyback yield is 5.68% based on its $44 billion market capitalization. This gives shareholders a 10.% total yield (i.e., 4.55% dividend yield plus 5.68% buyback yield=10.2%). That makes it very attractive to value investors who invest in PSX stock for the long term.
Shorting Puts for Extra Income
Investors can short out-of-the-money (OTM) puts in PSX stock to create income opportunities on top of its attractive 10% total yield. For example, for the expiration period ending June 2, 2023, which is 28 days from now, put and call options have very attractive premiums.
Investors who already own at least 100 shares in PSX stock can sell OTM calls on a “covered call” basis to make extra income. For example, the $100 strike price call options trade for 95 cents at the midpoint. That gives investors a covered call yield of 1.0% with less than one month before expiration (i.e., $0.95/$92.31).
That is an impressive yield and implies that an investor could make 12.0% on an annualized basis if this trade can be repeated every month for a year. Moreover, even if PSX rises to $100 on or before June 2, the investor stands to make an additional 8.33% in realized gains.
In addition, investors can make even more shorting out-of-the-money (OTM) put options in near-term expiration periods. For example, in the same June 2 expiration period, the $85.00 strike price puts, almost 8% below today's spot price, trade for a whopping $1.60 per put contract. That is 68% more than the $100 call strike price, which is a similar 8% or so distance from the spot price of $92.31.
This means that an investor who secures $8,500 in cash and/or margin with their brokerage firm can then enter in an order to “Sell to Open” one put contract at the $85 strike price. Their account will immediately receive $160 for every put contract shorted this way.
That works out to a premium-to-strike yield of 1.88% or 22.6% annually, significantly higher than the 1.0% covered call yield shown above (12% annualized).
Either way investors stand to make significant returns by shorting OTM puts and calls. This is on top of the attractive 10% total yield that PSX presently offers investors.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
