While I am willing to overlook a few holes in its balance sheet, I also know that many strong businesses have collapsed during tough economic periods. Here, I will look at the Rolls-Royce share price in detail to judge if the business is worth investing in before 2023. 

Can aviation boost Rolls-Royce shares?

Currently, the UK economy is under swirling clouds of uncertainty. The country is grappling with a huge energy crisis. In fact, reports show that the UK’s energy crisis is the worst in Western Europe. All of this has impacted how investors are looking at the market. 

This also has put an immense strain on businesses, including Rolls-Royce. The firm’s return to profitability in 2021 was a positive marker for investors. However, this already seems to have slowed down over 50% in the first half (H1) of 2022 with just £125m in profits.

The silver lining here is the return of air traffic. Rolls-Royce has already seen a spate of deals for its profitable engine upkeep business. Just today, a new venture with Air China to overhaul and maintain its sizable fleet was signed. 

While the latest crash in the Rolls-Royce share price is triggered by the health of the UK economy as a whole, the engineering firm is slowly looking to reverse recent fortunes.

Future focussed

The big reason why I am still slightly bullish on Rolls-Royce is because of the smart restructure. And the areas it’s exploring now have me buzzing. 

Energy and defence are a huge focus for the firm going forward. The invasion of Ukraine has derailed the energy sector and has countries in the region scrambling to improve defences. This has boosted both industries tremendously. 

And Rolls-Royce is set to play a big role in both. The firm’s small nuclear reactor project was given the green light by the UK government. The power systems division has seen its order book grow by 53% to £2.1bn. The second quarter (Q2) of 2022 especially saw a huge spike in sales. 

The other booming area for Rolls-Royce is defence. The company recently signed billion-dollar deals with the US, UK and German militaries. It holds a vast £6.5bn order book, which includes an 11-year contract to support the Adour engine, which powers UK’s Hawk jets. 

Concerns and verdict

Despite the large order books, profit margins have been falling. Its booming defence wing saw underlying profits fall 32% to £189m compared with H1 2021. The power systems also took a step back. H1 2021’s positive cash flow of £71m was reversed this year, with the sector bleeding out -£76m in H1 2022. 

The board chalked this up to high demand, increasing costs and supply chain challenges. But I think these figures will get worse thanks to rising commodity prices.

There is no denying the intrinsic value of Rolls-Royce shares at 77p. But right now, given the turbulence in the UK, I am waiting for 2022’s full-year reports before investing in Rolls-Royce shares. 

The post Should I snap up Rolls-Royce shares while they are still below £1? appeared first on The Twelfth Magpie.

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• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Suraj Radhakrishnan 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.

FTSE 100 shares in the energy sector have witnessed a huge surge in profits over 12 months. Like many investors, I am looking at shares in the industry that could supercharge my portfolio. While there are several good stocks on offer, I have identified two showing explosive growth potential over the next decade.

But first, why are renewable energy shares witnessing historic levels of interest right now? I think the COP 26 summit last year triggered the perfect storm for a transition to cleaner energy. While governments increased focus on green alternatives, crude oil prices rose after Russia’s invasion of Ukraine. This added fuel to the green energy lobby and countries are now scrambling to secure sustainable alternatives to meet the power demand.

With money pouring into Europe’s thriving energy sector, I think this is the perfect time to invest.

FTSE 100 shares I’d buy to capitalise

The first company on my list is SSE (LSE:SSE). The FTSE 100 giant has the largest renewable electricity portfolio in the UK and Ireland. It specialises in onshore and offshore wind as well as hydropower. The company sells and distributes its energy to UK’s power grid.

In the financial year (FY) 2021, SSE generated £6.83bn in revenue and a total income of £2.28bn. These figures jumped significantly in FY 2022 when the company generated a revenue of £8.61bn and recorded an income of £3bn. The 33% jump in income comes primarily from its renewables wing.

Thanks to this strong showing, the FTSE 100 share has gone up 15.4% in the last six months. And despite this jump, it is still trading at a price-to-earnings ratio of 7.7 times. SSE shares also come with a healthy 4.6% yield making it really cheap right now

The other company on my watchlist is Centrica (LSE:CNA), a power transmission and delivery company with 11.7 gigawatts (GW) of renewable power under management.

Centrica operates British Gas, which powers millions of homes in the country. Centrica has been adding services like installing EV chargers to help consumers hit net-zero emissions as well. The company also owns a 20% stake in UK’s nuclear energy bank which is considered one of the cleanest sources of energy today.

The FTSE 100 share saw its dividend reinstated last month after the company saw revenue jump a whopping 2,851.22% in 2021 to £1.21bn. Although this is in comparison to a terrible 2020, the bounce back is significant. The energy giant also presented a stronger balance sheet, repaying the £93m debt from 2021.

Concerns and verdict

While both companies look financially strong right now, it is worth noting that energy prices play a major role here. When energy prices stabilise, profits could trend back towards pre-pandemic levels. This will slow down the investor interest in these two FTSE 100 shares.

Right now, both companies have a strong cash flow. But as we move closer to UK’s net zero ambitions, R&D budgets and asset purchases will increase, which could affect future results.

However, given the size, reach, and finances of these two companies, I think they are the best FTSE 100 energy shares for my portfolio right now. Depending on share price performance, I may be tempted to make a £1,000 investment in both in the coming months.

The post Green energy boom: 2 explosive FTSE 100 shares I’d buy to capitalise appeared first on The Twelfth Magpie.

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• How UK shares could build a £339,849 ISA

Suraj Radhakrishnan 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.

Lloyds

As Lloyds (LSE: LLOY) continues its share buyback programme, the British bank has seen its stock price increase by 3% this week. A hawkish Bank of England has been stoking uncertainty surrounding Lloyds’ future. This arguably led to a number of director dealings happening this week.

Most notably, Lloyds’ CFO William Chalmers and Chief of Staff Janet Pope purchased a large number of shares. However, Group Corporate Affairs Director Andrew Walton and Scottish Widows Chief Executive Antonio Lorenzo also sold a substantial number of shares.

• Name: William Chalmers (Chief Financial Officer)
• Nature of transaction: DRIP shares
• Date of transaction: 20 May 2022
• Amount purchased: 168,865 @ £0.44
• Total value: £74,409.46

• Name: Antonio Lorenzo (Chief Executive, Scottish Widows and Group Director, Insurance and Wealth)
• Nature of transaction: DRIP shares
• Date of transaction: 19 May 2022
• Amount purchased: 884 @ £0.43
• Total value: £383.86

• Name: Antonio Lorenzo (Chief Executive, Scottish Widows and Group Director, Insurance and Wealth)
• Nature of transaction: Disposal of shares
• Date of transaction: 20 May 2022
• Amount sold: 250,000 @ £0.44
• Total value: £110,062.50

• Name: Vim Maru (Group Director, Retail)
• Nature of transaction: DRIP shares
• Date of transaction: 19 May 2022
• Amount purchased: 31 @ £0.43
• Total value: £13.46

• Name: Janet Pope (Chief of Staff and Group Director, Sustainable Business)
• Nature of transaction: DRIP shares
• Date of transaction: 19 May 2022 and 20 May 2022
• Amount purchased: 85,633 @ £0.44
• Total value: £37,735.00

• Name: Stephen Shelley (Chief Risk Officer)
• Nature of transaction: DRIP shares
• Date of transaction: 19 May 2022
• Amount purchased: 1,563 @ £0.43
• Total value: £678.70

• Name: Andrew Walton (Group Corporate Affairs Director)
• Nature of transaction: Disposal of shares
• Date of transaction: 19 May 2022
• Amount sold: 184,216 @ £0.43
• Total value: £79,986.68

IAG

The IAG (LSE: IAG) share price is up about 4% this week as the group announced a share buyback programme on Tuesday. Apart from that, a number of big director dealings occurred at IAG. Chairman and Iberia CEO Javier Sanchez-Prieto and CFO Nicholas Cadbury made the headlines. The latter had already received 1,473,207 shares as a part of IAG’s executive share plan, which will be vested in three tranches annually. Despite that, Cadbury still purchased more shares.

• Name: Javier Sanchez-Prieto (Chairman and CEO Iberia)
• Nature of transaction: Transfer of shares from one nominee account to another nominee account with no change of beneficial ownership
• Date of transaction: 23 May 2022
• Amount transferred: 181,014 @ Nil
• Total value: N/A

• Name: Nicholas Cadbury (Chief Financial Officer)
• Nature of transaction: Acquisition of shares
• Date of transaction: 24 May 2022
• Amount transferred: 254,979 @ £1.23
• Total value: £312,604.25

SSE

SSE (LSE: SSE) reported a decent set of numbers in its FY22 earnings this week. The firm generated profits of £1.5bn last year, and expects to make even more this year from high energy prices. But a windfall tax from the British government soured investor sentiment, sending the SSE share price down by almost 10%. Still, outgoing non-executive director Dame Angela Strank acquired a respectable number of shares.

• Name: Dame Angela Strank (Non-Executive Director)
• Nature of transaction: Acquisition of shares
• Date of transaction: 25 May 2022
• Amount transferred: 483 @ £18.49
• Total value: £8,929.14

Types of shares in a SIP

To provide context, there are a few types of shares within a company’s share incentive plan (SIP). A SIP is an employee plan for companies within the UK to flexibly award equity to employees. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

In this article’s instance, Lloyds’ director dealings used the dividends they received on SIP shares to reinvest into further Lloyds shares. It should be noted, though, that dividend shares must normally be held in the trust for at least three years to get full tax relief. On the other hand, IAG’s CFO received free shares as part of his compensation package.

The post Director dealings: Lloyds, IAG, SSE appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Lloyds Banking Group. 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.

HSBC

The HSBC share price has had a volatile time so far this year. The stock jumped nearly as high as 25% only to drop back down to a 5% gain this year. This has been mainly down to speculation of the bank having to break up its Asian and western operations. Amid all of the volatility however, it still didn’t stop a director from acquiring shares this week.

Dame Carolyn Fairbairn (The former CBI Director General) purchased a large number of HSBC shares on Wednesday.

• Name: Dame Carolyn Fairbairn (Non-executive Director)
• Nature of transaction: Acquisition of shares
• Date of transaction: 18 May 2022
• Amount purchased: 15,000 @ £5.01
• Total value: £75,150.00

National Grid

National Grid disclosed its FY22 results this week. The energy company reported an underlying operating profit of £4.0bn, which is 11% higher year on year. The firm also announced a final dividend of 33.76p, bringing the total dividend to 50.97p. This is a 3.7% increase in its yield. As a result, the National Grid share price is now up by more than 10% this year, sparking interest by a director in buying shares.

There’s still plenty of worry in the air. Talk of a possible windfall tax on energy companies has hindered the stock’s trajectory upwards. Nonetheless, a non-executive director still saw this is an opportunity to buy National Grid shares on Thursday.

• Name: Victoria Wood (CAP of Tony Wood, Non-executive Director)
• Nature of transaction: Acquisition of shares
• Date of transaction: 19 May 2022
• Amount purchased: 2,000 @ £12.29
• Total value: £24,586.60

Taylor Wimpey

Housebuilding giant Taylor Wimpey had a relatively decent week. Its shares managed to outperform the wider FTSE 100 index as it gained over 2%. Its stock is still down by more than 25% this year, but a number of director dealings are still happening inside the company, suggesting confidence that it has a bright future in the long term.

Although higher mortgage rates are expected to cool the housing market, Taylor Wimpey said: “Demand for our homes remains strong, with the business well positioned to deliver further progress in 2022 and beyond” in its most recent trading update. As such, a number of directors added more shares to their portfolio.

• Name: Jennie Daly (CEO)
• Nature of transaction: DRIP shares
• Date of transaction: 13 May 2022 (Reported 17 May 2022)
• Amount purchased: 5,815 @ £1.25
• Total value: £7,260.42

• Name: Chris Carney (Group Finance Director)
• Nature of transaction: DRIP shares
• Date of transaction: 13 May 2022 (Reported 17 May 2022)
• Amount purchased: 6,513 @ £1.25
• Total value: £8,131.92

To provide context, DRIP shares are usually part of a company’s share incentive plan (SIP). A SIP is an employee plan for companies within the UK to award equity to employees flexibly. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

There are many types of shares in an SIP. But in this instance, the CEO and Group Finance Director used the dividends they received on SIP shares to reinvest into further Taylor Wimpey shares. It should be noted though, that dividend shares must normally be held in the trust for at least three years to get full tax relief.

The post Director dealings: HSBC, National Grid, Taylor Wimpey appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended HSBC Holdings. 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.

A market index is essentially a hypothetical portfolio. More popular index funds consist of a country’s top companies or an industry within the stock market. Britain’s main index is the FTSE 100, which consists of the nation’s top 100 companies.

It has managed to stay level since the start of the year, while its counterpart across the Atlantic, the S&P 500, has seen a decline of 10%. The reason behind the two indexes’ different fortunes could be down to their respective constituents.

IPOs don’t like playing FTSE

For the last couple of years, the FTSE 100 has consistently underperformed its US equivalent, at least until recently. The reason for this was a lack of tech and growth companies in the index, as many of these firms opt to list in the US. This is due to the more stringent listing requirements for companies to list on the London Stock Exchange. These include:

• Minimum market capitalisation of £700,000.
• Minimum 25% of shares in public hands.
• Three year trading record required.
• Sponsors needed for new applicants and significant transactions.
• Prior shareholder approval required for significant transactions.

London has historically sought to limit the influence of individual executives, which has deterred many tech companies that are often founder-led. The additional stamp duty to purchase shares also stifles trading volume, presenting another disadvantage for stocks.

No tech, no problem

The FTSE reflects outsized weightings in energy, commodities, and financials. In fact, these three industries account for almost half of the UK’s main index. The S&P, on the other hand, only has 16% of its constituents in these three matured industries.

Due to sky high inflation, the US Federal Reserve has had to hike interest rates. Rising interest rates are normally conducted to slow consumer spending down from higher borrowing costs. So, how has this affected the S&P 500? Given that most technology and growth stocks are valued based on potential future cash flows, a slowdown in overall consumer spending can take a huge chunk off its valuation. This has been evident as tech stocks such as Meta have seen its share price decline 45% from its all-time high.

Simultaneously, FTSE-listed stocks have enjoyed immunity from the weakness of their tech peers. For one, energy stocks such as Shell and BP have enjoyed the tailwinds from rising oil prices. Moreover, high commodity prices in iron ore, copper, and aluminium have also held the index up. Financial stocks, including banks, have also benefited from rising interest rates. This trend is expected to continue in the short to medium term. The outlook for commodities, especially energy and materials, remains solid as the global economy continues to recover from the pandemic.

The million pound question

Is investing in a FTSE 100 fund a good investment for my portfolio then? Well, the British stock market is currently one of the cheapest in the world. It’s trading at a price-to-earnings (P/E) ratio of 14, far lower than the S&P 500’s 16. It also has a projected earnings yield of 13% over the next year, which is forecasted to be twice as much as the S&P.

On that basis, I’m keen to invest in the FTSE 100 for my portfolio through index funds like Vanguard FTSE 100 UCITS ETF (VUKE). Nonetheless, I also see a buying opportunity for the S&P 500, given its incredible track record of producing outstanding returns.

The post Here’s why the FTSE 100 has outperformed the S&P 500 this year appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. 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.

So the question is, can the Centrica share price recover to its pre-pandemic levels in 2021? And should I be adding the company to my portfolio?

The rising Centrica share price

Centrica is a utility provider for both businesses and residential properties. The firm suffered a £362m operating loss last year, primarily due to the disruptions from Covid-19. After all, with office buildings being mainly empty and regulators placing price caps on energy tariffs, the operating environment for the business has not exactly been ideal. So why is the Centrica share price going up?

Despite the seemingly poor performance, 2020 losses were actually halved compared to 2019. Meanwhile, as the economy begins to reopen, energy price limits are being lifted, easing the pressure on the company’s profit margins. In addition, the restructuring process of Centrica has also continued with the sale of its North American operation, Direct Energy. The deal flooded the balance sheet with £3.6bn of cash. And with its newly strengthened financial position, the management team cut down debts by £412m.

Overall, while the restructuring process is far from finished, it looks like the worst may have passed. And given that the Centrica share price is rising, I think it’s fair to say that I’m not alone in that opinion.

Some rising concerns

As encouraging as these results may be, the business still faces a considerable level of risk. The most prominent is the falling number of British Gas energy customers. While this figure remained relatively unchanged in the second half of 2020, it fell by around 2% in the first half. That’s the equivalent 164,000 customers switching to a competitor. What’s more, this decline included the additional 85,000 customers gained after the Robin Hood Energy acquisition.

Today the company has around 6.9m residential energy customers. By comparison, in 2015, this figure was closer to 14.6m. Needless to say, the company has performed poorly in retaining its customers over the years.

Whether the firm’s new strategies will be capable of reversing the falling popularity of British Gas within the residential energy sector has yet to be seen. But if it fails to do so, then Centrica’s customer numbers are likely to continue falling, taking its share price with it.

The bottom line

As the economy begins to reopen and people return to work, Ofcom has already started lifting the energy price caps again, helping Centrica’s profit margins. This may be sufficient to get the business back to its pre-pandemic levels in 2021. However, I remain pretty sceptical about its long-term prospects.

At this stage, I don’t think there’s enough information to determine whether the company’s restructuring will be sufficient to turn it around. And therefore, it’s staying on my watch list for now.

The post The Centrica share price rises: should I buy now? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Centrica. 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.

The wobbly SSE share price

Demand for residential gas and electricity increased significantly last year. After all, lockdown restrictions forced most individuals to stay at home. But they also forced non-essential businesses to close their doors. And consequently, the level of unemployment rose sharply.

For individuals unable to continue working from home, their level of household income declined, making keeping up with utility bills quite challenging. Ofcom, the UK energy regulator, imposed new price caps on energy tariffs to mitigate this impact.

Unfortunately, these price limitations put a considerable amount of pressure on profit margins. The SSE share price suffered for it. Overall, the total financial impact from Covid-19 on the business is expected to be between £150m and £200m, according to the management team.

Despite this, based on its half-year report, the company is actually performing relatively well. At least, I think so. The operating profit of the business increased, even after ignoring the additional £327m gained from the disposal of some non-core assets. And the firm continues to progress with its £7.5bn transition into renewable energy sources.

Combining all that with no expected cuts to demand or shareholder dividends does make SSE seem like a promising income stock to own. But I have some concerns.

Risks to consider

Based on the latest financial results, the company currently has around £10bn of debt on its balance sheet. As a result, around 65% of the firm’s capital structure currently consists of debt. This isn’t unmanageable. But it is quite a significant chunk of leverage that is eating up around a third of operating profits from interest payments alone. And while it is set to raise £2bn through its disposal programme, it could take several years to bring down this level of leverage.

This is particularly concerning as the firm is in the middle of the aforementioned expensive transition into renewable energy. Should creditors deem the business overburdened with loans, it could put the brakes on SSE’s future growth and its share price as well.

Bottom Line

With the UK economy slowly reopening and people returning to work, the affordability of household utilities is back on the rise. And so, Ofcom has already begun lifting the price caps on energy tariffs.

I have some reservations over SSE’s level of debt. However, based on current performance, I think the company can return to its pre-pandemic levels of profitability as well as maintain its 5.4% dividend yield. And so, SSE is a company I would consider adding to my income portfolio even after the recent increase in its share price.

The post The SSE share price is rising. Should I buy now? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in SSE. 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.

Here are three I think could make committed ‘buy and hold’ investors a lot of money over the next decade.

The robots are coming

If you believe the tabloids, many of us face near-certain redundancy as machines take over the world. Sensationalist headlines aside, it does feel like the trend towards automation is only going to get stronger as the years pass. Using robots for repetitive, mundane tasks does, after all, free up more time for humans to focus on more important work. 

One way of getting exposure is through the L&G Global Robotics and Automation ETF. This invests in a basket of 90 companies, all of whom generate a “material proportion of their revenues” from the industry. Fees are high, relative to your average FTSE 100 tracker, but this has been more than compensated for by the growth seen to date (+62.6% over the five years to December 31, 2019).

An alternative would be the iShares Robotics and Automation UCITS ETF which has a lower ongoing charge and slightly less concentrated portfolio. 

Going electric

The fact US manufacturer Tesla eclipsed £100bn in value last week should give some indication of just how excited investors are over the electric car revolution. 

This enthusiasm makes sense. Assuming the consensus forecast is right, there’ll be approximately 30m such vehicles on the roads in 2030. Right now, there are only 3m. 

You could, of course, just invest in Tesla (although be prepared for a bumpy ride). An alternative would be to buy into companies providing services to the global automotive industry, such as UK-listed AB Dynamics. 

For those with strong stomachs, there’s also the option to invest in businesses that specialise in mining for metals that will be essential to this market. Electric cars will, for example, require roughly three times the amount of copper needed in conventional vehicles. Nickel is likely to be a central component of the batteries that power them. 

While there are few funds currently dedicated to tracking this trend, iShares does offer a way in through its Electric Vehicles and Driver Technology UCITS ETF. With 95 holdings, the fund is sufficiently diversified and has a reasonable ongoing charge of 0.4%. 

Climate crisis

From the push for retailers to use less plastic, to the growing popularity of veganism, to using more environmentally-friendly ways of generating power, tackling climate change has become a priority.

Looked at purely from an investment perspective, this is potentially great news for a number of UK-listed firms. FTSE 100 member and corrugated packaging specialist DS Smith could be a big beneficiary, particularly as more and more of us are choosing to shop online. With its growing vegan range, high street baker Greggs could also be a tasty long-term hold. 

When it comes to renewable sources of energy, a relatively cheap exchange-traded fund might be best option, particularly as identifying the long-term winners in this space arguably requires more specialist knowledge.

Blackrock’s again offers such an option with its iShares Global Clean Energy UCITS ETF. The fund rose a little under 44% in 2019 alone, highlighting just how lucrative going green is becoming.

The post 3 megatrends for the next decade (and how to invest in them) appeared first on The Twelfth Magpie.

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Paul Summers owns shares of AB Dynamics, Greggs, and LEGAL & GENERAL UCITS ETF PUBLIC LIMITED COMPANY ROBO GLOBAL ROB&AUTO GO UCITS ETF (GBP). The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended AB Dynamics and DS Smith. 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.

With dividends continuing to look fragile and the risk of political and economic uncertainties further impacting the stock’s value, I still believe that there are far easier ways of making money in the markets.

Delayed payment

Today’s downgrade was attributed to the ‘standstill period’ in the UK’s Capacity Market Auction (which gives contracts to firms such as SSE to provide back-up power in winter months and at times of exceptional demand) following an EU court ruling back in November.

As a result of this delay, SSE believes that it will be “unlikely to receive, or be able to recognise” the remaining £60m of income derived from this market until after its 2018/19 financial year. 

Although the company was quick to state that assurances from the UK government should make this issue “a matter of timing only“, it did say that adjusted earnings per share for the current financial year will now be roughly 6p less than previously thought and somewhere between 64p and 69p.

Elsewhere, SSE — one of the ‘Big 6’ energy providers in the UK — confirmed plans to use up to £200m of the proceeds from recent sales of stakes in its telecoms business and onshore wind farms to fund a share buyback and reduce net debt. The former is likely to begin before the end of March. 

According to CEO Alistair Phillips-Davies, the company is also “making progress” in looking at options for its Energy Services arm, including listing it as a separate entity or selling it. If neither of these is possible then this retail division would be retained as a separate business. A further update on this has been promised, again, by the end of March. 

Dividend doubts

SSE’s stock was among the worst performing shares in the FTSE 100 this morning (although it has since recovered to trade flat), beaten only by sector peer Centrica. This means that the company’s value has now fallen by 20% since last May. 

This might not concern long-term holders, of course, particularly those who hold the shares for its chunky dividends. Based on today’s share price (and the company’s intention to return 97.5p per share to holders in 2018/19), SSE yields 8.45%. That’s clearly preferable to what you’d get from even the best Cash ISA.

The only problem with this is that expected profits currently fail to cover this cash return. The longer this goes on, the more likely SSE will need to take a knife to the payout. With utility companies often used as a political football, customers continuing to migrate to smaller competitors, the possibility of a sustained period of warm weather hurting consumption and Brexit on the horizon, I think the probability of this happening can’t be easily dismissed. 

A far easier way of generating cash, in my opinion, would be to buy an exchange-traded fund that tracks the FTSE 100 index. Not only will this allow you to receive a decent dividend for far less risk, it’s also a seriously cheap way of gaining exposure to some of the biggest companies in the UK, many of whom have arguably far better long-term prospects than beleaguered SSE. 

The post Here’s why I’d dump dividend stock SSE and buy the FTSE 100 instead appeared first on The Twelfth Magpie.

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Paul Summers 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.

However, the rally is showing signs of running out of steam. The price of Brent crude oil has fallen back from a peak of $53 a barrel in October as investors await for specific details of OPEC’s proposed supply cut, and the pound has stabilised in the wake of better-than-expected UK economic data.

Overvalued?

The price-to-earnings ratio (P/E) – perhaps, the most popular valuation ratio used by investors – now stands at 42.9 times for the energy giant. So, are Shell shares overvalued?

That ratio compares very unfavourably to Shell’s historical 5-year average P/E of 13.6. However, the backward-looking ratio does not taking into account of its anticipated earnings recovery and so does not provide a useful picture of its future performance.

But, even on forward-looking valuation measures, the stock still trades at historically very high multiples. Its forward P/E ratios, which values the stock on its expected future earnings, is 31.6 times for 2016 and 17.3 for 2017.

Bulls vs bears

Does a forward P/E of more than 30 times scream overpriced or not?

It all depends on your outlook of Shell’s long term earnings potential. Bulls would say Shell’s acquisition of BG Group has made it a powerhouse in liquefied natural gas (LNG), controlling some 20% of the global trade in seaborne gas. It also has a bulked up presence in deepwater oil production and petrochemicals, which further differentiates it from its rivals.

Energy prices have stabilised, and Shell’s focus on capital spending, operating costs and synergies have helped its bottom line to recover from recent lows. The company could once again prove its mettle when energy prices recover.

On the other hand, a bearish investor could argue that Shell’s exposure to high-cost production means the company isn’t well placed to cope with the ‘lower for longer’ price outlook.

At best, low energy prices will pressure short term profits. However, there may be long term consequences too, if prices resume their downward trajectory – already, Shell’s reserves replacement ratio fell to -20% last year. This meant that Shell didn’t just failed to replace its production with new reserves, but reserves shrank beyond that because additional reserves were written off as they became uneconomic to produce in today’s price environment.

My take

With valuation multiples so high, I think it’s Shell’s 7.3% dividend yield that is supporting its shares. And because most analysts believe Shell is unlikely to abandon its dividend policy any time soon, valuations will likely remain high for some time.

That said, Shell’s dividends are not risk-free. The company’s dividend futures are currently pricing in a dividend cut of 14% for 2017. That’s not to say a 14% dividend reduction is set to take place next year, but that the market is valuing Shell’s future dividends at a 14% discount to its current quarterly payout of $0.47 per share.

Although the dividend may still be very tempting, Shell’s earnings multiples are extremely high relative to historic norms. A clear indication that profitability will recover to pre-crash levels may justify this, but I just can’t see that happening any time soon.

The post Are Royal Dutch Shell plc shares overvalued? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.