At over 7,100 points, the FTSE 100 is getting closer to its pre-pandemic price. This has mainly been the result of normality starting to return to everyday life, and the economy being boosted as a result. Nonetheless, there are fears that a correction could be coming as Covid refuses to be fully beaten, and it is therefore important to be careful when picking FTSE 100 stocks. These two are my personal favourites right now.
The oil giant
Royal Dutch Shell (LSE: RDSB) was one of the worst FTSE 100 performers in 2020, due to the large fall in oil prices. Despite this, 2021 has been slightly more positive, with the Shell share price up around 12%. There are a few reasons why I think it can rise further.
Firstly, oil prices have recovered strongly since last year. Indeed, crude oil is now priced at around $75, compared to just $40 this time last year. As Shell’s profits are heavily dependent on oil prices, this bodes extremely well for the company’s earnings.
Secondly, the oil giant has recently demonstrated its intention to increase shareholder returns. This has been enabled because of the improved outlook, and strong financial results. And the company is further reducing its debt pile. As such, whether through the return of its share buyback programme or larger dividend payouts, shareholders are set to benefit from this optimism. This is a fundamental reason why Shell is one of my favourite FTSE 100 stocks right now.
There are a couple of risks to consider though. Firstly, energy is a volatile sector, and the price of oil can fall quickly. For example, while OPEC+ has endeavoured to cut the supply of oil over the past year, supply may now start to increase too quickly, and this would likely cause the price of oil to fall. Further, many in the industry believe that oil demand will peak in the next decade. This may hinder the long-term prospects of Shell.
A FTSE 100 stock with a big dividend
Legal & General (LSE: LGEN) managed to cope fairly well with the pandemic. In its 2020 results, operating profits were over £2.2bn, around the same as the year before. This represents a very strong performance, especially in extremely difficult circumstances. It has also come out of the pandemic in very strong financial health. For instance, its Solvency II coverage ratio is over 190%. This represents an extremely strong balance sheet, thus reducing the risk around Legal & General shares.
The main attraction of Legal & General is its dividend. In fact, the 2020 dividend of 17.57p equals a current dividend yield of 6.5%. This is far larger than the majority of other FTSE 100 stocks, and also looks at very little risk of a cut. On the contrary, the insurance company has a record of raising its dividend annually, and this seems likely to continue. This strong dividend is the reason why I’d happily add more LGEN shares to my portfolio.
Despite this, like many other financial companies, LGEN may struggle if the economic recovery starts to slow. Especially as government pandemic support starts to wind down, this is a real risk to consider.
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Stuart Blair owns shares in Royal Dutch Shell and Legal & General. 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.