Is BG Group the Ultimate Retirement Share?

LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at BG Group  (LSE: BG.L  ) , the highly successful gas exploration and production company whose share price has risen by more than 400% over the last 10 years.

Gas futures
BG Group has thoroughly outperformed the FTSE 100 over the last 10 years, thanks to stonking outright growth that's been consistently reflected in its share price and dividends:

Total Return

2007

2008

2009

2010

2011

Trailing-10-year avg.

BG Group

67.1%

(15.9%)

18.5%

16.7%

7.3%

18.6%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.4%

Source: Morningstar. (Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

BG Group's fantastic trailing 10-year average total return highlights how strongly and consistently it has grown over the last decade -- but does that make it a good retirement share?

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how BG Group shapes up:

Item

Value

Year founded

1997*

Market cap

£44 billion

Net debt

£7.4 billion

Dividend Yield

1.2%

5-year-avg. financials

Operating margin

38.9%

Interest cover

29.9x

EPS growth

15.5%

Dividend growth

14.9%

Dividend cover

7.0x

Source: Morningstar, Digital Look, BG Group.*BG Group was formed when British Gas plc demerged in 1996, resulting in the creation of BG Group plc and Centrica plc.

Here's how I've scored BG Group on each of these criteria:

Criteria

Comment

Score

Longevity Not really an old-timer, but mature for its age.

3/5

Performance vs. FTSE Outstanding.

5/5

Financial strength Investment commitments are demanding, but it's very profitable.

4/5

EPS growth Short-term volatility, but very solid over a longer time frame.

4/5

Dividend growth Excellent growth rate, high levels of cover and low yield are a reflection of its business model and growth demands.

3/5

Total: 19/25


BG Group is one of the dominant players in the global liquefied natural gas (LNG) market and I believe it will continue to deliver strong earnings growth. BG's business model includes the whole of the LNG supply chain, from exploration and production, through to transportation and wholesale. This helps it to generate strong profits in rising and falling gas markets, but it does require immense levels of capital investment -- one reason for BG Group's low dividend payout ratio (shown by a high level of dividend cover).

BG Group's score of 19/25 makes the company a strong candidate for a retirement fund portfolio, although its low yield is a disadvantage for anyone planning to retire in the next 10 years. A high-yielding energy share such as Royal Dutch Shell  (LSE: RDSB.L  ) would make far more sense for anyone planning to retire soon, especially given Shell's relatively modest P/E valuation at present.

For investors who are still a long way from retirement, I think that BG's future growth potential could outweigh its present poor yield and make it an excellent retirement share. As with some of the other high-growth, low-yield companies I have looked at recently -- like SABMiller  (LSE: SAB.L  ) -- anyone seeking to benefit from a decent retirement income from BG Group needs to be at least 10 years away from retirement. Over that period -- or longer -- yield on cost should rise alongside the shares' capital value to provide an attractive level of total return and future income.

Expert selections
If your retirement portfolio already contains an oil and gas share or if you are not keen on the energy sector, then one way of identifying great dividend-paying shares is to study the choices of successful professional investors.

One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download"8 Shares Held by Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

Fool contributor Roland Head owns shares in Royal Dutch Shell but does not own any other shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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