I’m tempted by the dirt cheap Shell share price, but I’ll buy Rio Tinto first

The Shell share price looks good value to me, but I’m also tempted by another cheap FTSE 100 stock that offers an even higher yield.

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The Shell (LSE: SHEL) share price looks like an unmissable bargain, trading at a lowly valuation of just 7.58 times earnings, and I’d happily pop it into my portfolio today. However, investing is about priorities and I’m even more excited about another FTSE 100 stock.

Mining giant Rio Tinto (LSE: RIO) has taken a beating lately amid growing concerns about the economic crisis in China. It also looks temptingly cheap.

Choices, choices

First, Shell. Last year was brilliant for the oil and gas sector as energy prices rocketed. An investor who bought the oil giant’s shares two years ago would be sitting on a profit of 71.13% today, with dividends on top.

The excitement has since ebbed with the stock up just 5.38% over the last 12 months.

Oil prices have fallen sharply from last year’s $116 peak, averaging $76.60 in the last quarter. Shell duly reported a hefty 47% drop in Q2 earnings to $5bn, down from last year’s record $11.5bn. That was a real one-off though, which triggered calls for a windfall tax. 

The board still announced a $3bn share buyback and has decided to line up another $2.5bn or so in Q3 “given the value that our shares represent”.

Today, Shell’s dividend yield is surprisingly low at 3.64%, but the board has promised a 15% hike. Markets forecast a yield of 4.29% for the 2023 financial year and 4.61% in 2024. Like BP, Shell carries a lot of net debt but at least it’s falling, from £44.2bn in Q1 to $40.3bn.

The board reckons that now is a good time to buy Shell, and I won’t dispute that. Yet I won’t buy today. Oil trades at around $85 following Saudi Arabian production cuts, but may fall as China slows, Iraq and Turkey hold talks over resuming Kurdish oil supplies, and rising interest rates squeeze global growth. 

Like BP, Shell also has yet to convince me that it can make the jump to renewables. Maybe it won’t need to amid the net zero backlash. Who knows?

Another factor holding me back is that Rio Tinto looks a more exciting opportunity today as its shares have crashed 25% in six months. Over one year, they’re down 6.75%. 

Rio recently reported a 25% drop in half-year earnings to $11.7bn last month, due to falling commodity prices and slowing Chinese demand.

I’ve made my choice

A lot of the macro demand factors affecting Shell also affect Rio Tinto. Their valuations are surprisingly similar with Rio only marginally cheaper, at 7.19 times earnings. The miner’s dividend looks more promising though, with a forecast yield of 6.7% in 2023 and 6.51% in 2024. Its net debt also looks more manageable at $4.35bn.

I think the best time to buy big blue-chips like Shell and Rio Tinto is when they’re out of favour and conditions look perilous. That applies to both today. There’s a fair chance their share prices could fall further, but given that I only buy shares with a minimum 10-year view, I can sweat it out. I might take the opportunity to buy more.

I’ll go for Rio Tinto first. It has fallen a little further, looks a little cheaper, and yields a fair bit more. If the Shell share price continues to slide, I’ll buy that too.

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.

Harvey Jones has positions in Rio Tinto Group. 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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