Phillips 66's (NYSE:PSX) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Phillips 66 (NYSE:PSX) has announced that it will be paying its dividend of $1.20 on the 2nd of June, an increased payment from last year's comparable dividend. Based on this payment, the dividend yield for the company will be 4.5%, which is fairly typical for the industry.

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Phillips 66's Payment Could Potentially Have Solid Earnings Coverage

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, the company was paying out 103% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 66%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

The next year is set to see EPS grow by 187.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 39%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Check out our latest analysis for Phillips 66

Phillips 66 Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. Since 2015, the annual payment back then was $2.00, compared to the most recent full-year payment of $4.80. This implies that the company grew its distributions at a yearly rate of about 9.1% over that duration. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

Phillips 66 Might Find It Hard To Grow Its Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. We are encouraged to see that Phillips 66 has grown earnings per share at 41% per year over the past five years. Strong earnings is nice to see, but unless this can be sustained on minimal reinvestment of profits, we would question whether dividends will follow suit.

Our Thoughts On Phillips 66's Dividend

Overall, we always like to see the dividend being raised, but we don't think Phillips 66 will make a great income stock. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Phillips 66 has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Is Phillips 66 not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.