Does BG Group plc Pass My Triple-Yield Test?

oil rig

Like most private investors, I drip feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE 100 is up 71% on its March 2009 low, and the wider market is no longer cheap — it’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over BG Group (LSE: BG) (NASDAQOTH: BRGYY.US), to see if it might fit the bill.

The triple yield test

Today’s low cash saving and government bond rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my income portfolio, I like to look at three key trailing yield figures –the dividend, earnings and free cash flow yields. I call this my triple yield test:

BG Group Value
Current share price 1,075p
Dividend yield 1.7%
Earnings yield 7.3%
Free cash flow yield 1.6%
FTSE 100 average dividend yield 3.0%
FTSE 100 earnings yield 5.8%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.7%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield.

BG’s earnings yield of 7.3% reflects a P/E rating of 13.7, although this is based on adjusted earnings — the firm’s statutory earnings were much lower in 2013, thanks mainly to a $2bn impairment against its Egyptian operations and a $1.7bn impairment relating to BG’s US shale gas business. However, as these were non-cash, I’m happy to ignore them in my assessment of BG’s underlying performance.

BG has never been an income stock and it still isn’t, although it’s worth noting that despite the firm’s torrid year, the dividend was just about covered by free cash flow, which is always a good thing.

Is BG a buy?

BG’s share price has fallen by 18% so far this year, and is 30% below its 2012 high of more than 1,500p. In my view, this decline is part of the firm’s transition from growth stock to oil and gas major.

I can’t predict when BG’s share price will bottom out, but I believe that the firm’s quality assets and future earnings potential — starting in 2015 — should provide a floor somewhere near the current share price.

If I was a BG shareholder who’d purchased at high levels, I’d be tempted to average down at the moment, but as an outsider looking in, I’d probably wait a little longer before hitting the buy button.

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Despite its recent falls, BG's share price is still 722% higher than it was in February 2000 -- in contrast, the FTSE 100 is just 6% higher than it was fourteen years ago…

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> Roland does not own shares in BG Group.