A Practical Analysis Of BG Group Plc’s Dividend

Is BG Group plc (LON: BG) in good shape to deliver decent dividends?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The ability to calculate the reliability of dividends is absolutely crucial for investors, not only for evaluating the income generated from your portfolio, but also to avoid a share-price collapse from stocks where payouts are slashed.

There are a variety of ways to judge future dividends, and today I am looking at BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) to see whether the firm looks a safe bet to produce dependable payouts.

Forward dividend cover

Forward dividend cover is one of the most simple ways to evaluate future payouts, as the ratio reveals how many times the projected dividend per share is covered by earnings per share. It can be calculated using the following formula:

Forward earnings per share ÷ forward dividend per share

BG Group is set to offer a dividend of 18.3p per share in 2013, according to the City’s number crunchers. With earnings per share of 80.9p predicted for this period, dividend cover comes out at 4.4 times, more than double the widely classified safety benchmark of 2 times.

Free cash flow

Free cash flow is essentially how much cash has been generated after all costs and can often differ from reported profits. Theoretically, a company generating shedloads of cash is in a better position to reward stakeholders with plump dividends. The figure can be calculated by the following calculation:

Operating profit + depreciation & amortisation – tax – capital expenditure – working capital increase

BG Group posted negative free cash flow of $2.23bn in 2012, although this was an improvement from a negative reading of $3.64bn the previous year. Operating profit edged higher, to $8.05bn from $7.73bn, while depreciation and amortisation also stood at $2.59bn versus $2.29bn in 2011. As well, working capital increased $176m in 2012 compared with $574m previously.

Financial gearing

This ratio is used to gauge the level debt a company carries. Simply put, the higher the amount, the more difficult it may be to generate lucrative dividends for shareholders. It can be calculated using the following calculation:

Short- and long-term debts + pension liabilities – cash & cash equivalents

___________________________________________________________            x 100

                                      Shareholder funds

The oil firm’s gearing ratio came in at 33.5% last year, down from 39.6% in 2011. Although total debt rose to $15.51bn from $15.14bn, cash and cash equivalents advanced to $4.52bn from $3.6bn, while pension liabilities also moved lower. As well, an increase in shareholders’ funds, to $33.09bn from $29.68bn, also took the ratio lower.

Buybacks and other spare cash

Like all major oil plays, BG Group is required to heap lots of cash into exploration and development — group production is widely expected to rocket higher from this year onwards. The firm plans to fork out $12bn this year and next for asset investment, and between $8bn and $10bn through to 2016.

In particular, the firm is spending big in order to turbocharge output at its massive Queensland Curtis LNG asset in Australia, while it has also earmarked vast sums for its offshore projects in Brazil.

Dividend yield expected to remain unattractive

Although the firm has steadily grown payouts in recent years, in my opinion BG Group fails the test as a decent dividend pick mainly due to the paltry yields on offer. Indeed, a reading of 1.7% for 2013 falls well short of the 3.3% FTSE 100 average.

The company is hoping to become cash flow positive from 2015 as group-wide output takes off. Still, I expect that escalating capital expenditure will continue to dominate movements in the balance sheet at the expense of lucrative shareholder rewards.

The expert’s guide for intelligent investors

Although BG Group lacks a compelling dividend prospects in my opinion, this newly updated special report  highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.

Woodford — head of UK Equities at Invesco Perpetual — has more than 30 years’ experience in the industry, and boasts an exceptional track record when it comes to selecting stock market stars.

This exclusive report, compiled by The Motley Fool’s crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.

> Royston does not own shares in BG Group.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Nvidia shares hit a new high after record earnings. Is there a lot more to come?

Nvidia stock smashes expectations, as quarterly profit soars 600%. It's time for a 10-for-one stock split too, as it reaches…

Read more »

Abstract 3d arrows with rocket
Investing Articles

Scottish Mortgage shares rise following FY update! Time to buy?

Scottish Mortgage (LON:SMT) shares were closing in on 900p today after a positive full-year report from the giant FTSE 100…

Read more »

British Isles on nautical map
Investing For Beginners

It’s time! Here’s my FTSE 100 hit list for the general election

Jon Smith outlines the potential reaction for the FTSE 100 from the upcoming general election and the main stocks he's…

Read more »

Investing Articles

National Grid reveals £7bn rights issue and the share price plunges – should I invest now?

The National Grid share price has dropped almost 10% and a dividend cut is looming, but it may be a…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Nvidia stock is becoming more affordable!

Nvidia stock is up 2,500% over five years, but the chip giant’s share split -- announced during its earnings report…

Read more »

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »