Is BG Group The Ultimate Retirement Share?

Published in Company Comment on 4 September 2012

Will shares in BG Group help you build a FTSE-beating retirement fund?

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 UK 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 UK 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), the highly successful gas exploration and production company whose share price has risen by more than 400% over the last ten 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 Return20072008200920102011Trailing 10 yr avg.
BG Group67.1%-15.9%18.5%16.7%7.3%18.6%
FTSE 1007.4%-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:

Year founded1997*
Market cap£44bn
Net debt£7.4bn
Dividend Yield1.2%
5 year average financials
Operating margin38.9%
Interest cover29.9x
EPS growth15.5%
Dividend growth14.9%
Dividend cover7.0x

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:

LongevityNot really an old-timer, but mature for its age.3/5
Performance vs. FTSEOutstanding.5/5
Financial strengthInvestment commitments are demanding, but it's very profitable.4/5
EPS growthShort-term volatility, but very solid over a longer time frame.4/5
Dividend growthExcellent 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 ten years. A high-yielding energy share such as Royal Dutch Shell (LSE: RDSB) 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) -- 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 Mr 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.

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Further investment opportunities:

> Roland owns shares in Royal Dutch Shell but does not own any other shares mentioned in this article.

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johandesilva 05 Sep 2012 , 9:04am

Sensible advice but what happens if the oil and gas run out in 30 years time? Will not be the big players that suffer? Perhaps mix BG Group with diversified companies with a high amount devoted in Kurdistan. Companies like Afren, Heritage Oil and Genel or riskier explorers like Petroceltic.

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