Is Shell the FTSE 100’s greatest dividend bargain?

The Shell share price is rising again. But on paper the oil giant still looks like one of the FTSE 100's best-value income stocks.

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I’m searching the FTSE 100 for the best-value dividend stocks to buy. And oil major Shell (LSE:SHEL) has flashed up on my screen as a potential contender.

The values of UK oil majors have risen on Monday on news of another production cut by OPEC+ members. The Shell share price for example is up as the supply reduction has boosted crude costs.

Yet at current levels of £23.15 per share Shell shares still offer solid all-round value. The business trades on a forward price-to-earnings (P/E) ratio of 6.7 times. It also carries a FTSE 100-beating 4.2% prospective dividend yield.

Encouragingly, things get even better for 2024 too. Predictions of further dividend hikes push the yield for next year to 4.6%.

To me it seems as if Shell could be in great shape to meet current dividend forecasts as well. Predicted payouts over the next two years are covered between 3.2 times and 3.5 times by estimated earnings.

Any reading above 2 times provides a wide degree of safety for income investors.

So what should I do next? Well, first let's look at that OPEC+ news and consider the implications it has for Shell.

To recap, Saudi Arabia said over the weekend it will cut daily production by up to 1m barrels a day in July. Other members of OPEC+ — the cartel responsible for 40% of all crude supply — have also pledged to reduce output next month.

Continued production cuts are putting a floor under oil prices. And OPEC+ has suggested there could be more to come if energy demand weakens. For investors, this is taking a lot of the risk out of buying Shell shares.

But even if OPEC+ continues cutting to offset falling demand, oil companies like this offer other significant dangers that worry me as a potential investor. First of all is the possibility of a whopping new windfall tax in Britain, calls for which have heightened following the FTSE firm's recent blowout results.

Last month, Shell reported a forecast-busting $9.6bn profit for the first quarter. In response it launched a $4bn share buyback programme to the ire of consumer groups and MPs.

The Labour Party has already pledged to ramp up the levies charged to oil firms if they win next year's general election.

But profits-sapping taxes aren't my biggest fear with buying oil producers. I’m more concerned with how they will fare as countries race to hit their net zero targets.

Shell is investing in areas like renewables, carbon capture and hydrogen. However, the amount the firm is spending on clean energy remains dwarfed by its planned expenditure on oil and gas.

This year the business has earmarked total capital expenditure of up to $27bn for 2023. But the business told Bloomberg earlier this year that just $3.5bn of this will be spent on low-carbon projects. Oil-related spending looks set to continue outstripping expenditure elsewhere by a large margin.

Clearly, Shell remains eager to return lots of cash (including via big dividends) to its shareholders. But its ability to keep doing this over the long term is in jeopardy.

On balance, I’d rather buy other cheap dividend shares for my portfolio.

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Royston Wild has no position in any of the shares mentioned. 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.