When it comes to buying shares in my Stocks and Shares ISA, I look for one thing – a stock selling for less than it’s worth. And one FTSE 100 company stands out to me at the moment.
Right now, Shell (LSE:SHEL) is considering switching its listing to New York. The reason being that the company feels the London markets are undervaluing its shares.
Undervaluation
Shell is one of the six oil majors. And its stock currently trades at a lower price-to-earnings (P/E) ratio than most of its counterparts, especially those listed in the US.
The gap isn’t actually that wide at the moment. Shell’s stock trades at a P/E ratio of 12.7, which is lower than Chevron (13.9), ExxonMobil (13.5), and ConocoPhillips (14.4) – but not by that much.
Oil stocks P/E ratio
Created at TradingView
Over the last year though, the stock has consistently traded at a lower multiple than its US peers. CEO Wael Sawan believes this is unjustified – and he might have a point.
The biggest (but not the only) difference between Shell and the US oil majors is that one is listed in the UK. But is that a legitimate reason to discount the company’s shares, or a potential opportunity?
UK discount?
I don’t think it’s necessarily unreasonable to put a lower value on a company’s shares because of where that business is based. And there are distinct risks with a UK stock.
One example is the danger of government interference dampening the firm’s profits. This is most obvious in the oil sector, where the government introduced a windfall tax as oil prices increased.
Another is public sentiment, demonstrated by the outrage at Tesco managing to grow its profits when household budgets are under pressure. Oil companies are no more popular.
Oil stocks ROIC
Created at TradingView
The challenges are real, but Shell has managed to produce returns on invested capital in line with its US counterparts over the last decade. So it’s possible the market’s overestimating these risks.
Share buybacks
Shell’s reduced share price isn’t all bad news. An elevated oil price – partly due to the uncertainty in the Middle East – has caused the company to generate strong cash flows, even after taxes.
Unlike its UK counterpart BP, Shell has predominantly focused on returning this excess cash to its shareholders. This has been through a combination of dividends and share buybacks.
From a tax perspective, share buybacks can be an efficient way of returning capital to shareholders. But they work by reducing the outstanding share count and this is most effective with a lower share price.
In at least one sense then, Shell’s investors can afford to relax about the company potentially trading below its intrinsic value. There’s a greater benefit to shareholders from share buybacks.
Should I buy the stock?
Of all the oil majors, Shell would be my choice. Strategically, I prefer it to BP and a 15% withholding tax on dividends from US companies makes them less attractive.
In the short term, I’m looking to see what happens to the oil price as the conflict in the Middle East develops. But I’m definitely keeping a close eye on the company for my Stocks and Shares ISA.
The post Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA? appeared first on The Motley Fool UK.
We think earning passive income has never been easier
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Get your free passive income stock pick
More reading
Warren Buffett is an investing genius. But what might he buy if he were British?
Hargreaves Lansdown investors have been buying dividend stocks BP and Shell. Should I?
Here’s why the FTSE 100 is still my top choice for dividend income
Where will the Shell share price go next?
Is Shell’s share price the bargain its CEO implies it is?
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. 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.
