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Mega-profit Shell could be the FTSE 100’s best value stock

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Image source: Getty Images

It would be difficult to find a better value stock on the FTSE 100 than Shell (LSE:SHEL), in my opinion.

The oil and gas major reported record profits of $39.9bn (£32.2bn) in 2022, the highest in its 115 years in business.

And the new man at the top, CEO Wael Sawan, has vowed to be “aggressive” to improve dividends for shareholders.

At the same time, the stock trades on a price-to-earnings (P/E) ratio of just seven. Its main rivals, US oil giants Chevron and ExxonMobil, are much more expensive at P/E ratios of 10.2 and 11, respectively.

Profit boom

There are several points acting directly in Shell’s favour today.

Geopolitical tensions in the Middle East mean oil and natural gas prices have soared.

Global gas demand was weak in 2023, growing at just 0.5% a year. But 2024 is set to be much different.

That’s according to the International Energy Administration. Demand for natural gas will be five times higher this year, it says.

Gas is Shell’s biggest money spinner,” says a recent report in Britain’s Financial Times. This division produced more than 50% of Shell’s $14.7bn (£11.6bn) profit in the first half of 2023.

So it’s no wonder Sawan is moving to expand output from Shell’s liquified natural gas (LNG) assets.

It’s worth noting that nothing is certain in business. Shell’s sale of its Nigerian onshore oil assets for $1.3bn could see it lose market share. And wider growth forecasts for the gas market could fall short of expectations.

Dividend returns

Shell shocked the market during the pandemic when it slashed its dividend by 65%. Investors had relied on 188 cents per share, one of the FTSE 100’s biggest payouts. But the “crisis of uncertainty” of 2020 saw this drop to 65 cents per share. It was the first time the company had cut its dividend since 1945.

It’s no surprise this decision lost Shell much of the goodwill it had built up over the previous seven decades.

But dividends are returning to form. A total of 65.3 cents per share in 2020 grew 36% to 89.35 cents in 2021, and again to 103.75 cents in 2022.

Today’s 4% dividend yield is better than half of the FTSE 100. And City analysts have pegged that to increase to 4.2% in 2024 and 4.7% in 2025.

Given Sawan’s mandate to aggressively increase profits and dividend returns for shareholders? I’d say with reasonable confidence Shell will not cut its dividend again in the near future.

The company is also reining in its spending. Sawan has also plumped for a $1bn budget cut for 2024 and 2025. And the multi-billion dollar share buybacks are returning. The latest of these, starting in November 2023, took $3.5bn of Shell shares off the market.

Shell shock

Value stocks on the FTSE 100 rarely remain undervalued for long.

We heard on 29 January that more UK companies are now issuing profit warnings than at the start of the great financial crisis.

So taking positions in structurally important companies — with record profits — seems a sensible move.

And given the change of leadership and the dividend boost? It looks like happier times are on the agenda for Shell shareholders.

The post Mega-profit Shell could be the FTSE 100’s best value stock appeared first on The Motley Fool UK.

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Tom Rodgers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024