I’m searching for the best cheap UK shares to buy for passive income. And oil giant Shell (LSE:SHEL) has grabbed my attention this week after it announced plans to supercharge dividends.
I’ve long been a sceptic about the FTSE 100 oilie. Is now the time for me to reconsider my position?
Dividend boost
In Wednesday’s tantalising update, Shell said that between 30% and 40% of operating cash flow will be dedicated to dividend payments going forwards. This is up from between 20% and 30% previously.
And it declared that it would increase the dividend by 15% from the second quarter. Shell also said it would make further share buybacks of “at least” $5bn during the second half of 2023.
These plans will be supported by reductions in yearly capital spending, it said, to between $22bn and $25bn in 2024 and 2025. It is targeting operating cost reductions of $2bn to $3bn by 2025 to support its dividend programme, too.
So what next?
As a long-term investor, I’m unmoved by all of this news, however. To tell you the truth, I still wouldn’t touch Shell’s shares with a bargepole.
Okay, oil prices could remain rock-solid over a shorter time horizon as OPEC+ countries continue cutting output. But fossil fuel values — and with them the profitability of the oil majors — could reverse sharply over the next decade as the world transitions to green energy.
On this point, Shell’s update this week actually gave me more reason for concern than celebration. In it the FTSE firm announced plans to maintain oil production rather than make good on prior plans to cut it.
Okay, the London business said it will spend $10bn to $15bn between 2023 and 2025 “to support the development of low-carbon energy solutions including biofuels, hydrogen, electric vehicle charging and [carbon capture and storage].”
But this is a drop in the ocean compared to the huge sums it is spending on its oil operations.
A damning report
I fear that Shell could be betting on the wrong horse by peddling back on its oil reduction plans.
A report from the International Energy Agency (IEA) also released this week underlines the huge risk of Shell’s new strategy. In it the body claimed that global demand growth “is set to slow significantly,” with predicted demand growth of 2.4m barrels a day this year cooling to just 400,000 barrels in 2028.
The IEA said that:
Growth in the world’s demand for oil is set to slow almost to a halt in the coming years, with the high prices and security of supply concerns highlighted by the global energy crisis hastening the shift towards cleaner energy technologies.
Cheap but risky
On paper, Shell’s share price offers terrific all-round value today. It trades on a forward price-to-earnings (P/E) ratio of 6.3 times. And it carries a FTSE 100-beating 4.4% dividend yield for 2023.
But this cheapness reflects the enormous risk of buying the energy firm’s shares today. I believe there are much better UK shares for me to buy for passive income.
