A Closer Look at BG Group's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of BG Group  (LSE: BG  ) (NASDAQOTH: BRGGY) and assessing whether the company is an appetizing pick for income investors.

How does BG Group's dividend history stack up?

 

2009

2010

2011

2012

FY Dividend Per Share

12.35 pence

21.6 U.S. cents

23.76 U.S. cents

26.14 U.S. cents

DPS Growth

10%

10%

10%

10%

Dividend Cover

5.4x

5.5x

5.3x

5x

Source: BG Group Company Accounts

BG group has steadily increased the full-year dividend during the previous four years, even in times of severe earnings pressure -- the company still initiated a double-digit hike even as earnings per share fell by more than a quarter in 2009. Steady earnings growth since then has underpinned shareholder payments.

Like all oil and gas producers, the company has kept dividend cover well above the security threshold of two times forward earnings, with heavy capital expenditure curtailing shareholder payouts in relation to earnings.

What are BG Group's dividends expected to do?

 

2013

2014

FY Dividend Per Share

28.1 U.S. cents

30.9 U.S. cents

DPS Growth

7.5%

10%

Dividend Cover

4.2x

4.3x

Dividend Yield

1.5%

1.7%

Source: Investec. Exchange rate: £1=$1.52117

Broker Investec expects earnings per share to decline 6% in 2013 before rebounding 14% the following year as production ramps up and drives revenues skywards. Falling earnings next year will push dividend growth below the historical 10% average, it reckons, before moving back to the norm the following year.

Earnings pressure is also anticipated to drag dividend cover lower, although still well north of the safety benchmark of two times.

BG Group announced earlier this month that production fell 3% in the January-March period to $1.2 billion, largely as a result of falling production volumes which slipped 3%, and rising costs in its upstream operations.

However, earnings are expected to head higher again from next year as output explodes at its major projects across the globe. The firm is still on course to bring its massive Queensland Curtis LNG project in Australia on stream at the start of next year, while it is also increasing activity in Brazil -- a third offshore vessel is due to begin production in the current quarter, while a fourth and fifth are 60% complete.

How does BG Group's dividend prospects rate against the competition?

 

Prospective Dividend Yield

Prospective P/E Ratio

Oil and Gas Producers

5.7%

22

FTSE 100

3.1%

16

Source: Digital Look

BG Group was recently dealing on a P/E rating of 15.3 for 2013, below both that of the FTSE 100 as well as its oil industry counterparts, but investors will have to swallow a much lower dividend yield. Indeed, the oil sector's average projected dividend for 2013 is more than three times that of BG Group.

I expect that, under the stewardship of industry veteran Chris Finlayson, BG Group is on track to reap juicy rewards in coming years as activity across its significant projects hits the high notes in coming years. However, I believe that the firm's lowly dividend yield make it an inappropriate pick for those seeking juicy investment income.

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