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Is BG Group plc A Super Income Stock?

The last five years have been incredibly tough for investors in BG (LSE: BG) (NASDAQOTH: BRGYY.US). Not only has it underperformed the FTSE 100 (which is up over 73% during the last five years) its share price has fallen since the current bull market began in March 2009, with shares being 2% lower than they were five years ago. However, does this period of vast underperformance mean that shares are now attractive for income-seeking investors? Is BG now a super income stock?

An Income Play?

The striking observation of BG as a potential income play is its dividend payout ratio. Indeed, in 2013 the company paid out just 23% of net profit as a dividend to shareholders. This is incredibly low: even though BG is a mature company operating in a mature industry it still chooses to reinvest the vast majority of profits back into the business, with the aim of stimulating higher growth rates in future.

oil rigOf course, BG has experienced disappointment in the past and its earnings are relatively volatile, so it is perhaps understandable that management may wish to follow a fairly cautious dividend policy. The problem for income-seeking investors, though, is that shares currently yield just 1.6%. This is not only less than half the yield of the FTSE 100 (which has a yield of around 3.5%) it is also below current levels of inflation and roughly in-line with savings rates that can be obtained from various high-street banks.

Furthermore, while dividends per share are forecast to grow over the next two years at an annualised rate of 8.3%, BG starts from such a low base that even above-average dividend growth is not going to push the yield past 2% by 2015 (unless the share price falls, that is). As a result, it’s difficult to get excited about the stock as a pure income play.

Looking Ahead

While BG may not appeal at present as an income stock, it continues to have a very strong and diverse asset base which should deliver medium to long term growth in profitability for the company. Certainly, there will be ups and downs with regard to profitability but BG remains a highly profitable company with vast potential. While it isn’t particularly attractive to income-seekers right now, should its dividend policy become more generous then then there could be ample earnings to make BG a super income stock over the long run.

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Peter does not own shares in BG.