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.
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> Royston does not own shares in BG Group.
