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2 Attractively Priced Refiners for Total Returns and Income

A look at two refiners that could offer double-digit total returns

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Nov 26, 2021
  • The price of gasoline is considerably higher than it was last year.
  • Refiners have underperformed the broader energy sector year-to-date.
  • Phillips 66 and Valero trade below their GF Values and pay at least a 5% dividend yield.
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Global oil demand has climbed much higher this year, with both Brent and WTI crude moving about $80 a barrel. WTI crude is now slightly below this level, but it's well off the lows of last year.

Higher crude prices have trickled down to other channels. Last month, the AAA stated that the average price of a gallon of gasoline was up more than $1 in the U.S. for the month of October compared to the prior year. Gas prices nationwide are at the highest average level since 2014.

One sector benefiting from higher prices has been the energy sector. The iShares Global Energy ETF (

IXC, Financial) is up nearly 41% year-to-date while the S&P 500 Index is higher by 25%. Looking more closely at the refiners, however, the VanEck Vectors Oil Refiners ETF (CRAK, Financial) is up only 12.4% in 2021.

With so many names in the sector benefiting from higher energy prices, some valuations have increased to levels not seen in quite some time. That said, there are still names in the energy sector that are trading below their intrinsic value estimates while offering dividend yields higher than that of the average yield of the S&P 500 Index.

In this article, we will explore two such undervalued refiner stocks that could offer the double benefit of share price gains and high dividend yields.

Phillips 66

Spun off from ConocoPhillips (COP), Phillips 66 (

PSX, Financial) is a downstream-focused energy company. The company has four business units: refining, midstream, chemicals and marketing. Phillips 66 has a market capitalization in excess of $32 billion and generated revenue of $98 billion over the last four quarters.

Phillips 66 has paid a dividend every year that the company has been an independent entity. The company raised its dividend 2.2% for the upcoming Dec. 1 payment date, increasing the dividend growth streak to nine consecutive years. Prior to this, Phillips 66 had maintained its payout rate for the previous 10 quarterly distributions. Even so, Phillips 66’s dividend has a compound annual growth rate (CAGR) of more than 15% since 2013, the first year the company paid a dividend in all four quarters.

Shares of Phillips 66 yield 5% today, nearly four times the average yield of the S&P 500 index. According to Value Line, the current yield is also superior to the stock’s average yield of 3.1% since 2013.

Shareholders will receive $3.62 of dividends per share in 2021. According to Wall Street analysts, the company is predicted to earn $4.27 per share this year, resulting in a projected payout ratio of 85%. This is considerably higher than the long-term average payout ratio of 29%, but the payout ratio is expected to normalize a bit next year as earnings are expected to reach $6.71 in 2022.

Phillips 66’s stock closed Wednesday’s trading session at $73.87. Using analysts’ estimates for 2021, the stock is trading with a forward price-earnings ratio of 17.3. This is a premium to the long-term average multiple of 13.2. Using next year’s estimates, however, the forward price-earnings ratio drops to 11, placing the stock at a discount to analysts’ expectations for 2022.

The GuruFocus Value chart also shows shares trading below their intrinsic value estimate:


Phillips 66 has a GF Value of $84.12, giving shares a price-to-GF-Value ratio of 0.88. Climbing to meet the GF Value would result in a return of 13.9% from the most recent closing price. Factoring in the dividend, total returns could extend into the high-teen’s range.

Phillips 66, like most energy companies, endured a difficult 2020, but the company was still able to maintain its dividend. Even with the lengthy dividend pause, the dividend CAGR is very aggressive and today’s yield higher than it has usually been for the stock.

Looking closely at just the refiners, the VanEck Vectors Oil Refiners ETF (

CRAK, Financial) is up 12.3% in 2021. Phillips 66’s 6% return lags its peer group, but Phillips 66 trades below its typical valuation using next year’s earnings and shows considerable upside potential compared to the GF Value.


Valero Energy Corporation (

VLO, Financial) is one of the largest independent petroleum refiners in North America. The company owns 15 petroleum refineries in the U.S., Canada and the UK. Valero is valued at just under $30 billion and produced revenue of $95 billion over the last year.

Valero last raised its dividend for the March 4, 2020 payment date. That raise increased its dividend by 9%. The company has maintained its dividend for the last eight quarters. With the most recent announced distribution meaning that shareholders will receive the same dividend for 2021 as they did for 2020, Valero’s dividend growth streak of 10 years will end.

Still, Valero’s dividend growth has been aggressive as the CAGR for the 2011 to 2020 period of time was just over 33%. The company did cut its dividend following the 2007 to 2009 time period, but growth quickly returned. In fact, the dividend made a new high just two years later. Given that 2020 had such unusual circumstances because of the pandemic, it is likely that growth will resume in the very near future considering how Valero handled the dividend last time it was forced to make a cut.

Valero yields 5.4%, more than four times the average yield of the market index. This is also well ahead of the 10-year average yield of 3.3%. If the stock were to average this yield for the entire year it would Valero’s second highest over the last 15 years after last year.

Valero will distribute $3.92 of dividends per share in 2020. With analysts expecting the company to earn just $1.44 per share, the projected payout ratio is more than 270%. This likely explains why the company has paused its dividend for two years. Looking out to 2022, analysts believe the company will earn $5.94 per share, which is just below the five-year average earnings per share that Valero produced prior to the pandemic. Using this figure, the payout ratio is 66%, much more in-line with the recent dividend payout ratio.

Valero closed the most recent session at $72.95, equating to a forward price-earnings ratio of 12.3 using next year’s estimates. This is slightly ahead of the 10-year average price-earnings ratio of 10.3.

Shares of the company have performed better than Phillips 66 as well as the refiner index in 2021, with the stock up 29% year-to-date. The GF Value Chart rates the stock as fairly valued.


Valero has a GF Value of $78.53, giving the stock a price-to-GF-Value ratio of 0.93. Shares are rated as fairly valued, but Valero could see a return of 7.6% if it were to reach its GF Value. Add in the dividend yield and total returns could reach the low double-digits.

Valero’s dividend growth streak has come to an end, but the stock compensates investors with a very high yield. The expected dividend payout ratio for the year is unsustainable long-term. Fortunately, analysts believe that the company’s earnings per share will be more in-line with its usual performance. The stock has acted well this year, but double-digit total returns are still possible.

Final thoughts

The energy sector can be a fickle beast for investors as bear markets can be as brutal for companies in the space as bull markets are rewarding when demand for energy products is high.

Phillips 66 and Valero are two stocks that offer high yields, but also the potential for additional price returns based on current valuations. Phillips 66 has lagged the refiner index, but could see high-teen’s total returns. Valero’s business hasn’t quite recovered like Phillips 66, but that is projected to change next year. The stock’s yield is generous.

The more conservative investor might prefer Phillips 66 because the stock has yet to participate in the energy rally this year and has a dividend that appears to be on much firmer ground. The investor who wishes to ride the momentum of a stock performing well while receiving a higher yield might elect to pick Valero instead.


I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The views of this author are solely their own opinion and are not endorsed or guaranteed by
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