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I reckon Shell is still a top passive income FTSE 100 stock – for now

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Silhouette of an oil rig
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There was a time when I could be sure of Shell (LSE: RDSB) and its place in an investment portfolio. I can’t be sure of very much at all in these strange times, and that also applies to this mighty FTSE 100 fossil fuel giant.

A decade ago, shares in Shell traded at 2,294p. Today I can snap them up for 1,665p, around 27% less. Incredibly, they traded at a lowly 995p in September 2020, just before the Pfizer vaccination bounce. At the time I wrote that now could be the time to get greedy and buy both Shell and BP.

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A little unsure of Shell

That turned out to be a good call in retrospect but what about today? The Shell share price is up 40% over 12 months, boosted by the oil price recovery and looming energy crisis. Yet it doesn’t look overpriced either, measured by a forward P/E ratio of 9.3 times earnings.

The dividend is starting to gush again, after July’s 40% increase. Shell’s stock now offers a forecast yield of 3.8%, while cover of 2.8 times gives room for progression. Management is also pursuing $2bn of share buybacks, further rewarding shareholders.

The Shell share price jumped 2% on hearing of plans to drop its dual-share structure of A and B shares and shift its headquarters (and tax residence) to the UK. As well as avoiding the 15% Dutch dividend withholding tax, this will give it more freedom to offer share buybacks.

It will also help Shell sidestep climate action in the Dutch courts and may also be a rebuke to Dutch pension fund giant ABP, which recently divested £15bn of fossil fuel holdings, including a large chunk of Shell.

So a lot of thing are going Shell’s way right now, which in normal times would be great news for the share price. However, management still has to face up to the climate change threat, wherever its head office is based. 

Green around the gills

Shell is now looking to cut emissions by 50% by 2030. That’s up from 20% but still looks leisurely as climate urgency grows. Scope 3 emissions are a far bigger challenge. These are generated by burning the group’s fuels and account for around 90% of its carbon footprint. The board aims to hit net zero by 2050. It may have to speed up that target as well.

Shell is talking the green talk but is the board ready to walk it, too? I’m not so sure. It may be planning a $3bn annual spend on green technology, but will invest four times as much in drilling for oil. Given the mood of the times, that probably has to change. 

Investors must shake off the assumption that just because Shell was huge in the past, it will be again. We are clearly still going to continue using fossil fuel to fund the energy transition, and on that basis Shell is still a buy for my portfolio. However, management will have to invest more in renewables. These days, it’s not easy not being green.

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Harvey Jones 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.

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