Warren Buffet Puts $4.5 Billion Into Phillips 66 Stock After Dumping ExxonMobil Stock. Why?

  • Warren Buffet's Berkshire Hathaway  put more money into Phillips 66, bringing total investment to $4.51 billion.
  • Markets responded, as Phillips 66 stock price climbed higher following the news.
  • Phillips 66 is a stable long term investment.
Warren Buffett is buying Phillips 66 Stock article image

With oil prices plummeting and a cloud of uncertainty hanging over the industry, you can be excused to thinking it would take a madman to invest $4.98 billion into Phillips 66 (NYSE:PSX). By September 10th 2015, Warren Buffet’s Berkshire Hathaway did just that. In this case there is a strategy in the madness.

This mark of confidence by the shrewd and highly successful billionaire, that Warren Buffet is, has drawn a lot of attention to Phillips 66 stock. Consequently, on September 10th, the share price spiked from $80.17 to $81.96 in less than 4 hours.

Let’s delve into the numbers to understand why Phillips 66 stock is such an attractive investment opportunity. Phillips 66’ dividend yield currently sits at 2.8% with a price to earnings ratio of 10.2. On the other hand, the S&P 500 has a dividend yield of 1.9% and a price to earnings ratio of 19.9. In brief, Philips 66 is having the competition for breakfast, lunch, and dinner. It is such healthy returns which is getting Warren Buffet and other investors excited.

Phillips 66 stock price has gained 100%+ in a time span of a little bit more than 3 years. As it grows, the share price has remained stable for relatively long periods of time. This is one of the ways investors are able to easily measure a corporation’s stability.

PSX stock chart

Source: Phillips stock price data by amigobulls.com

You see, Phillips 66 is unique in the sense that 75% of its revenue comes from refining oil and creating oil-based chemical products. These are two ‘evergreen’ processes which are critical for industries the world over. This makes Phillips 66  stock a good one to hold until retirement or pass on to loved ones.

Furthermore, there are some key metrics which have made investors take a serious second look at the Phillips 66 stock. Firstly, their quick ratio is 1.16, per a thestreet report. Importantly, this conveys that they are unlikely to have short term cash problems.  Consequently, this shows great financial management… a key factor when looking for a stock to invest in.

Secondly, net operating cash flow has soared by 71.92% on a YoY basis (can be seen in report referenced in the above paragraph.)

The oil & gas industry is cash-intensive with razor-thin margins. In fact, it isn’t uncommon for a business in this sector to lose millions per week. However, Phillips 66 has managed to stay on top of their finances, and have an average cashflow growth rate which is well above the industry average of -20.76%. Consequently, if they were to remain this stable, this company would be a great investment for long term investors.

As mentioned in the thestreet report, Another key metric, return on equity, has improved on a YoY basis, and out performed most of the S&P 500. It is worth noting that compared to other oil and gas companies, Phillips 66 has underperformed with regard to this metric. However, taking everything into account, this is still a solid buy stock.

In conclusion, Warren Buffet has a solid track record of picking winners and making smart business decisions. The fact is Phillips 66 is what can be regarded as an ‘evergreen’ business. To be more specific, they synthesise oil-based chemical products. These are products that most industries have a constant demand for. Moreover, oil prices don’t affect oil refineries as much as companies in the major integrated oil & gas industries… for instance Exxon Mobil. This is why Warren Buffet dumped Exxon Mobil stock and pumped more money into Phillips 66.

Finally, Phillips 66- despite their success- aren’t a corporation to rest on their laurels. They continue to make strategic investments; for instance, increasing its investment in DCP midstream, a move announced on September 10th, 2015.

Abdul Jawula Abdul Jawula   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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