This Magnificent Energy Stock Has Returned $43 Billion in Cash to Investors Since 2012 (and There's Plenty More to Come in 2025 and Beyond)

Phillips 66 (NYSE: PSX) has done a magnificent job returning value to shareholders since its spinoff from ConocoPhillips in 2012. The integrated downstream energy company has returned an impressive $43 billion in cash to its shareholders over the past dozen years. That's more than 200% of its initial market capitalization.

The energy company is in a strong position to continue generating cash and returning it to shareholders. Here's a look at why.

A cash flow producing (and returning) machine

Phillips 66 is unique among its peers in the energy sector. While it's best known for its downstream services like refining and retail, its business also includes midstream facilities (transportation, storage, terminals, and more) as well as chemicals and renewable fuels operations. This integration delivers higher returns with less volatility than specialists or fully integrated players with exploration and production operations (like ExxonMobil). This differentiated strategy enables Phillips 66 to earn high returns on new capital investments while generating lower-volatility cash flows.

The company has spent heavily to expand its non-refining operations and generate less volatile cash flows. It has invested in organic capital projects and made several strategic acquisitions to increase and diversify its earnings capacity. This strategy has the company on track to grow its annual earnings capacity by $4 billion to $14 billion in 2025 compared to its level in 2022. That should drive a more than 50% increase in its cash flow from operations (from $7 billion to over $10 billion), which will give it more cash to distribute to investors.

The company set a target in 2022 to deliver $13 billion to $15 billion in cumulative cash distributions to its shareholders by the end of this year. That low-end target would push its total cash distributions to shareholders to $43 billion since its launch in 2012.

Phillips 66 has delivered those cash returns through a combination of dividend increases and share repurchases or exchanges. It has increased its dividend every year since 2012, growing the payout at an impressive 16% compound annual rate, including by 10% earlier this year. In addition, it has gobbled up 34% of its outstanding shares, including an impressive 7.2% over the past year.

Primed to produce (and return) more cash in 2025

Phillips 66 expects to really hit its stride next year. The company should achieve its mid-cycle target of $14 billion in earnings while its cash flow from operations should rise to over $10 billion.

The company expects to reinvest about $2.1 billion of its cash flow into sustaining (roughly $1 billion of projects) and growing (about $1.1 billion) its operations. Notable growth projects include advancing its integrated natural gas liquids wellhead-to-market strategy, high-return capital projects at its refining operations, and optimizing its Rodeo Renewable Energy Complex outside San Francisco. In addition, the company expects its joint ventures to invest another $560 million into growth-related projects. These growth-focused investments will drive higher earnings and cash flow in 2025 and beyond.

That capital budget is a little less than this year's level ($2.2 billion). Because of that, Phillips 66 should generate even more free cash flow next year. On top of that, its cash resources are growing. The company recently agreed to sell its 25% interest in the Gulf Coast Express Pipeline for $865 million. As a result, the company has now exceeded its $3 billion target for non-core asset sales. That's further strengthening its already elite balance sheet, which features a strong credit rating, low leverage ratio, significant liquidity, and balanced debt maturity profile.

With its cash flow rising and its balance sheet growing even stronger, Phillips 66 is in an excellent position to continue returning a boatload of cash to shareholders in 2025. It will almost certainly provide its investors with another sizable dividend increase. In addition, the energy company will continue buying back a meaningful amount of stock. It could return more than $5 billion in cash to shareholders in 2024, given its aim to return more than 50% of its cash flow from operations, which should rise to $10 billion next year.

The total package

Phillips 66's strategy of investing to become a more diversified downstream company has paid big dividends for shareholders. The company has significantly grown its earnings capacity while lowering the volatility of its cash flows. Because of that, it has been able to return a lot of cash to investors, which should continue in 2025 and beyond. Those features make it a compelling option for investors seeking a lower-risk way to invest in the energy sector.

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Matt DiLallo has positions in ConocoPhillips and Phillips 66. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.