23 reasons to buy this FTSE 100 stock?

The 23 member of OPEC+ decided to cut oil production this week. Our writer looks at one FTSE 100 stock that should benefit from the surprise decision.

| 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.

White female supervisor working at an oil rig

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.

Most FTSE 100 stocks don’t react well to rising oil prices. Recent history has shown us that higher energy costs cause soaring inflation, which acts as a brake on the global economy.

The 13 members of the Organization of the Petroleum Exporting Countries (OPEC), plus 10 other oil-rich states, are collectively known as OPEC+. These countries account for 40% of global oil production. They also own 80% of the world’s proven oil reserves.

The power of OPEC and OPEC+ is therefore considerable. And its unlikely to wane any time soon. According to the International Energy Agency, peak demand for oil is not expected until 2035.

OPEC+ uses its power to keep oil prices as high as possible without choking off demand.

This week, members of the cartel voluntarily agreed to reduce production by 1m barrels a day — equal to approximately 1% of global demand.

Not surprisingly, the price of oil jumped 6% on the news. It still remains well below its recent peak. The Brent crude benchmark is now trading at $82, compared to $130 in June last year.

But Shell (LSE:SHEL) was one FTSE 100 stock that reacted positively to this week’s surprise decision by OPEC+. The energy giant’s shares gained 4% after the announcement was made.

Yet to be convinced

However, even with OPEC+ clearly intent on maintaining an elevated oil price, I’m not that keen on buying shares in Shell. Here are my three reasons.

Firstly, gas prices are falling. And Shell sells a lot of liquid natural gas (LNG) and associated products.

Gas prices are likely to remain low for some time as, unlike oil, they are much more difficult to manipulate. Russia tried to restrict flows to Europe ahead of last winter. But through a combination of luck (milder weather) and sensible demand management, gas prices didn’t rise as Russia had hoped.

Prices in Europe are currently 80% lower than they were in August 2022. In the US, gas is trading in line with historical norms.

Those dreaded buybacks

Secondly, I don’t like the way Shell rewards its shareholders.

In cash terms, its dividend is currently 45% lower than it was in 2019.

Yet, despite generating more surplus cash than ever before, the company decided to spend 2.5 times more on buying its own shares ($19bn) than it did on dividends ($7.6bn).

YearCash flow from operations ($bn)Dividend per share ($)
201853.11.88
201942.21.88
202034.10.65
202145.10.89
202268.41.04

The biggest beneficiaries of this policy are members of the management team whose bonuses are based on earnings per share. As a shareholder, I prefer cash in my hand.

Not cheap

Finally, the company’s share price is only 13% lower than it was in May 2018, when the dividend was $1.88 per share.

In my opinion, the current outlook for energy prices doesn’t justify the stock being as close to its five-year high.

Although the company’s price-to-earnings (P/E) ratio is reasonable — it’s currently just below eight — I’m conscious that it’s based on last year’s record-breaking earnings.

Looking after number one

In common with OPEC’s members, I’m going to act out of self-interest.

Like me, the oil cartel is seeking a “fair return on capital for those investing in the petroleum industry“. With a dividend yield below the FTSE 100 average, I wouldn’t get that with Shell. I’m therefore not going to invest at the moment.

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.

James Beard 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »