The FTSE 100 is home to many companies that prioritise dividend payments. That makes the index a great hunting ground for those after passive income. And Shell (LSE: SHEL) shares might be the best option out of all of them.
Big cash flows
While no one would be shocked to learn oil majors make a lot of money, the cash flow generated is insane. Shell boasted £23.4bn free cash flow last year. The biggest cash-making non-oil firm on the Footsie made £9.7bn. The average was just £0.41bn.
Those payments meant shareholder distributions of around 7% in the last 12 months. That includes a mix of dividends and buybacks. The dividend itself grew by 15% from the second quarter as well.
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The payout ratio was just over 44%. So even after all dividends and buybacks are accounted for, Shell retains plenty of cash for future distributions, debt servicing and new projects including green technology.
The shares look cheap compared to international competitors too. The price-to-free-cash-flow ratio is 7.10 compared to TotalEnergies at 11.31, ExxonMobil at 12.31, and Chevron at 14.47.
Oil prices
Now, before we get ahead of ourselves, let’s look at the downsides too. Shell styles itself as a group of energy and oil & gas companies. But the reality is that oil & gas accounts for over 99% of revenues. Therefore, the share price will follow commodity prices.
This can work in Shell’s favour as it did in the last few years as rising oil prices led the share price to grow to nearly three times its value. On the other hand, lowered demand from an economic slowdown or increasing supply from OPEC production could crash the share price too.
Even if I was comfortable with such reliance on oil and gas prices, the phasing out of these fossil fuels must be addressed too.
While most of us accept we’ll need oil for a while yet, the world is working towards a day when we have the technology to substitute it for other, cleaner energy sources.
Some way off?
When will that be? Well, the forecasts are all over the place. The International Energy Agency claim that fossil fuels must be cut by 75% in the next 10 years to achieve the Net Zero 2050 target. On the other hand, OPEC expects oil demand to keep increasing until 2045.
This shift to green energy could end the company, but there might be a long-term play in here too. Shell is keen to stress it wants to be at the heart of the energy transition. The firm spent over a billion dollars on renewables projects last year, for example.
In the meantime, I’d say the passive income here looks excellent. I would buy the shares if I had spare cash available.
