Phillips 66 is Buffett’s 6th Largest Holding – 79 million shares

Last year, Warren Buffett made his first purchase of Phillips 66 (ticker: PSX) stock amid the depletion in oil prices and the consequent depletion of oilfield service stocks.

Oil refiner Phillips 66 now represents a major holding for Berkshire Hathaway (ticker: BRK), the sixth-largest holding in the company portfolio. During the second quarter of 2016, Buffett added to his substantial holding by purchasing an additional 3.23 million shares. The total investment in Phillips 66 has a market value of $6.25 billion as of June 30, 2016.

Attraction of Phillips 66

Phillips 66 spun off from ConocoPhillips in 2012, and has eclipsed market twice over since the IPO. The stock has gone up 110% (excluding dividends) since the initial offering, with the S&P 500 gaining 59% over the same timeframe.

Phillips 66 has two of the calling cards of a Buffett investment with a strong dividend and a veteran management team. Following the announcement of the initial investment in Phillips 66, Buffett mentioned he was fond of the company’s management team.

Since launching the IPO, Phillips 66 has increased dividends six times, and achieved a dividend growth rate of 33% per year. The current dividend yield for Phillips 66 is 3.3%. Buffett has always been quite fond of companies that pay dividends, with over 90% of his portfolio invested in dividend paying companies. The top four holdings of Berkshire Hathaway have an average dividend yield of 3%, and comprise roughly 60% of Berkshire’s portfolio.

Berkshire now holds nearly 79 million shares, approximately 15% of Phillips 66 outstanding stock.

The recent volatility in oil prices has wreaked havoc on oil and gas exploration companies as the prices have fallen. However, the same has not been true for refiners. The volatility in oil prices has benefitted refiners as feedstock costs have depleted with the oil price and refinery margins have risen. Phillips refining business led to an 11% increase in net income over last year, with the refining portion of the company realizing 60% earnings growth for the year.

Another aspect to the refining business that has drawn Buffett’s attention is the high barrier to entry. A refinery can easily cost into the billions of dollars to build, and the payback period tends to be substantial with such a large investment. A company that is already operational and generating cash flow has a major advantage over those trying to enter the game. This works in Phillips 66’s favor, especially in a depleted price environment when investors may be hesitant to build new facilities.

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