2021 has been a good for the FTSE 100 oil biggie Royal Dutch Shell (LSE: RDSB). The stock’s ascent had started soon after the stock market rally started in last November. It was further bolstered by the increase in oil prices earlier this year. And as the economy recovery gathered pace, it has only strengthened further. In the last six months alone, its share price has risen some 27%.
Optimism on the Shell share price
And I do not think that this is the end of its climb either. Consider this. The stock is presently trading at around £17 levels, which is still 500p lower than its pre-pandemic value. I get that there is still some uncertainty around the stock. The pandemic keeps rearing its head, what with the new Omicron variant! And travel is most likely to be impacted if the situation gets out of hand again. This, naturally, will impact oil prices negatively. However, I think it is fair to say that the likelihood of going back to 2020 style lockdowns is rather limited. We are more likely to make progress. This in turn means that the Shell share price could keep rising.
Indeed, analysts seem to believe that. Even the most pessimistic analyst forecasts expect a small increase over the next 12 months, while the most optimistic ones expect it to more than double! And I reckon some increase at least is possible if it continues to turn profits. It has been profitable for the first nine months of its current financial year, which suggests to me that it could end the year on a high note as well.
Relative price and dividends
However, there are downsides to the stock too. The one ratio I always consider when deciding whether or not to buy a stock is the price-to-earnings (P/E) ratio, which allows an easy comparison across all other potential purchases for me. Shell’s P/E is around 38 times right now, which I think is high compared to 17 times for the FTSE 100 as a whole.
Its dividend yield could be better too. It is presently 3.7%, which is slightly above the average FTSE 100 yield. However, it might not cut it for me next year. Inflation in the UK is expected to average 4% next year. And that means my real passive return from Shell would actually be negative if it does not increase its dividends from their present levels. Also, its peer BP already has a higher yield of 4.6%, so I would much rather buy that stock for a passive income.
On the whole, though, I like the Shell stock. It could be one great earnings release away from a far more tempered P/E ratio. If its earnings rise significantly, with the price at the same level, it follows that its P/E will decline. Also, bigger dividends might just be one announcement away. And I think it is probably, considering the likely profits for oil biggies this year. I think I would buy more shares now for my portfolio.
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Manika Premsingh owns shares of Royal Dutch Shell B. 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.