by Robert Hauver
As the price of crude oil has fallen this year, most energy-related stocks have gotten hammered…except for some refining stocks. Why? Because lower crude prices mean lower feedstock costs for refiners, and actually pump up refiners’ profit margins. This fact has not gone unnoticed by the market, which has favored some refiners over other energy-related stocks in recent weeks.
This article covers 2 dividend stocks which are beneficiaries of this turn in fortunes – Marathon Petroleum, (MPC), and Phillips 66, (PSX). While these aren’t high dividend stocks, they do have high options yields, which we’ll cover later on in the article.
MPC has done much better than PSX in all of the following time periods:
However, PSX’s fortunes may be about to change – Goldman Sachs analyst Neil Mehta just added PSX and MPC to his recommended Buy list on 11/18/14, and PSX is up over 3.7% over the last week.
MPC is engaged in refining, transporting, and marketing petroleum products primarily in the US. It operates through 3 segments: Refining & Marketing, Speedway, and Pipeline Transportation.
MPC refines crude oil and other feed stocks at its 7 refineries in the Gulf Coast and Midwest regions of the US; and purchases ethanol and refined products for resale. Its refined products include gasoline, distillates, propane, feed stocks and special products, heavy fuel oil, and asphalt.
MPC also sells transportation fuels and convenience products in the retail market through Speedway convenience stores, and transports crude oil and other feedstocks to its refineries and other locations.
MPC markets its refined products to resellers, consumers, independent retailers, wholesale customers, marathon-branded jobbers, its Speedway convenience stores, airlines, transportation companies, and utility companies, as well as exports its refined products.
As of2/4/14, MPC owned, leased, and had ownership interests in approximately 8,300 miles of pipeline, as well as owned and operated 1,480 convenience stores in 9 states of the United States; and operated 5,200 independently owned retail outlets in the 18 states of the United States.
PSX – PSX Phillips 66 operates as an energy manufacturing and logistics company, operating in 4 segments: Midstream, Chemicals, Refining, Marketing and Specialties.
Refining buys, sells, and refines crude oil and other feedstocks into petroleum products, such as gasolines, distillates, and aviation fuels in the United States, Europe, and Asia.
Marketing and Specialties purchases for resale and markets refined petroleum products comprising gasolines, distillates, and aviation fuels in the United States and Europe. This segment manufactures and sells specialty products, such as petroleum coke, waxes, solvents, and polypropylene.
Midstream transports crude oil and other feedstocks to its refineries and other locations, as well as delivers refined and specialty products, also gathers, processes, transports, and markets natural gas; and transports, fractionates, and markets natural gas liquids in the United States.
Chemicals produces and markets ethylene, propylene, and other olefin products. It also manufactures and markets aromatics products, such as benzene, styrene, paraxylene, and cyclohexane, as well as polystyrene and styrene-butadiene copolymers.
Dividends: Coincidentally, both of these stocks pay $.50 quarterly. PSX has a slightly shorter dividend history than MPC, as it was only spun off from Conoco Phillips in 2012. Since 2012, it has more than doubled its dividend, from $.20, to the current $.50.
MPC started paying dividends in 2011, and has also raised its payout from $.20 to $.50 per quarter.
Both stocks have a low dividend payout ratio.
Options: Although neither stock has a high dividend yield, you can dramatically improve upon their dividends by selling options. This MPC covered call trade expires in April 2015, and has a $95.00 strike price, which offers you $1.20 in potential price gains.
The PSX trade expires in May 2015, just long enough for you to qualify for a second quarterly dividend.
You can find more details on our free Covered Calls Table for these and over 25 other trades.
We’ve detailed the 3 main income scenarios for the MPC trade below:
An alternative strategy would be to sell cash secured puts below the stock’s price/share. Both of these trades’ put options offer you a much higher payout than the quarterly dividends – MPC’s pays $5.90, over 11 times its $.50 quarterly dividend, while PSX’s $75.00 put would pay you $5.40, over 5 times PSX’s next 2 dividends.
Our free Cash Secured Puts Table gives you more details on these and over 25 other put-selling trades.
Undervalued Earnings: Both stocks look undervalued on a 2015 PEG basis – MPC has a very low .51 PEG, and PSX has a low .65 PEG:
Both firms had blowout earnings in their most recent quarter, even with lower sales figures, thanks to expanding margins, as the crude price was much cheaper than Q3 2013:
Valuations: Both stocks also look undervalued for most of the following metrics:
Financials: In addition, they both have significantly better than average mgt. efficiency ratios, and carry less debt:
Disclosure: Author had no positions in MPC or PSX yet at the time of this publication
Disclaimer: This article was written for informational purposes only. Author not responsible for any errors or omissions.
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