Should I buy more Shell shares?

Is the Shell share price about to peak? Roland Head explains why he thinks it’s important to focus on the big picture.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Shell (LSE: SHEL) has been an unlikely stock market hero this year. Shell shares have risen by over 30% in 2022 and are 55% higher than they were one year ago.

I’ve profited from Shell’s recovery thanks to a small holding in my portfolio. But I’m starting to worry that we could see a sharp share price correction if energy prices moderate. Here’s what I’ve decided to do.

Getting back to normal?

Shell’s share price has now returned to levels last seen in 2019. At first glance, this might seem fair enough. Global oil and gas demand is pretty much back to pre-pandemic levels, after all.

However, Shell isn’t the same company it was before the pandemic. In 2021, Shell promised to start cutting oil production by 2% each year. The FTSE 100 group also said it would slash petrol and diesel production by 55% by 2030.

Alongside, this, Shell plans to step up spending on renewables and its retail operations. All of these changes are part of a plan to achieve net zero emissions by 2050.

I’m positive about these plans. I think Shell’s huge global retail and energy trading network is well positioned to support a switch to low emission fuels like hydrogen and electricity. But I’m not sure how these changes might affect long-term profits.

Profits could peak this year

Shell is expected to report record profits in 2022. But if energy prices stay this high, I think it’s pretty certain that the UK and many other countries will fall into recession.

That would probably cause oil and gas demand to fall. Prices would follow and Shell’s earnings would return to more normal levels.

In my view, chief executive Ben Van Beurden’s actions suggest that he also expects profits to fall. Since cutting Shell’s dividend in 2020, Van Beurden has kept Shell’s dividend at a fairly low level, relative to earnings.

Instead of paying out cash to shareholders, he’s pumping Shell’s spare cash into share buybacks — spending $8.5bn during the first half of 2022 alone.

Share buybacks reduce the number of shares in issue. This can provide a boost to future earnings per share, helping to offset falling profits.

Shell shares: what I’m doing

Shell is currently trading on less than six times 2022 forecast earnings. A low price-to-earnings ratio is a traditional value indicator, suggesting the shares could be cheap. If Shell can take advantage of its lower cost base to generate more stable profits, I think there could be an opportunity here.

However, broker forecasts suggest that Shell’s earnings may peak this year. I also think that the stock’s 3.7% dividend yield could put a limit on share price growth.

With interest rates rising and the risk of slowing growth, I reckon investors will want at least a 3.5% income from Shell shares. I know I do. That effectively caps the price for buying today at 2,400p.

On balance, think Shell looks fully priced today. I won’t be investing any more of my money in this business unless the shares become much cheaper.

I haven’t sold my Shell shares yet as I’m waiting to see how market conditions change over the summer. But my guess is that I probably will sell later this year.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has positions in Shell plc. 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.

More on Investing Articles

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

Here’s where the Lloyds share price would be trading if it was a US bank

The Lloyds share price has surged from its lows a few years ago. However, it still trades at a discount…

Read more »

Businesswoman calculating finances in an office
Investing Articles

In 12 months, a £10,000 investment in Lloyds shares could become…

Lloyds shares have soared more than 40% since the start of the calendar year. Can the FTSE 100 bank continue…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

Consider these 3 FTSE 100 and FTSE 250 shares for long-term rewards!

The UK stock market is packed with long-term investment potential. Here are three top shares to consider, including one from…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£10,000 invested in Santander shares 5 years ago is now worth…

Our writer digs into surging Santander shares to see whether they might be a good fit for his passive income…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

Low P/E ratios and 6%+ dividend yields! Could these FTSE 100 shares be irresistible?

These FTSE 100 shares look highly discounted at today's prices. Does this make them brilliant bargains or possible investor traps?

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

With a 30% increase since the start of the year, does the Barclays share price still offer good value?

In light of an impressive Barclays share price rally, our writer considers the attractiveness of the bank’s stock relative to…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

How much passive income could we earn from UK shares with just £10 per day?

Even with modest amounts of money to invest, we can still consider investing in the UK stock market to generate…

Read more »

Night Takeoff Of The American Space Shuttle
Investing Articles

3 booming growth shares in the Scottish Mortgage portfolio

Our writer highlights a diverse trio of red-hot shares from the portfolio of Scottish Mortgage Investment Trust. Are any worth…

Read more »