Is It Still Safe to Buy BG Group?


LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market could be overheating.

So right now I'm analysing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today's uncertain economy.

Today I'm looking at BG Group (NASDAQOTH: BRGGY) to determine whether the shares are still safe to buy at 1,164 pence.

So, how's business going?
Last year, BG fell out of favor with the market and plummeted as much a 20% in one day when it announced that oil and gas output for 2012 was going to be lower than expected.

However, this bad news is now behind the company and BG is trying to reinvent itself with a new strategy aimed at boosting oil and gas output, while reducing spending on costly, complex midstream projects.

Indeed, BG recently released a strategy update, within which the management announced that the company was going to increase spending on exploration for hydrocarbons by 50% over the next three years, while at the same time reducing capital expenditure spending by approximately 20% a year.

This change of strategy should be beneficial for BG's investors, as the most profitable part of the company is oil and gas production, with a profit margin of 46% compared to the company's midstream assets, which have a profit margin of 33%.

Expected growth
Unfortunately, due to lower production volumes this year, many City analysts expect BG's earnings per share to fall 3% to $1.26. However, City forecasts currently predict that the company will return to growth in 2014 and achieve earnings of $1.40 per share.

Shareholder returns
Unlike the majority of its peers in the oil and gas producers sector, BG doesn't really offer its investors much in the way of shareholder payouts. In fact, BG's dividend yield is currently 1.4%, significantly less than that of its peers in the sector, which currently offer an average dividend yield of 4%.

Having said that, City forecasts expect the company's payout to rise 8% next year to $0.28 per share -- covered nearly five times by earnings and therefore leaving plenty of room for dividend growth.

BG trades at a historic P/E of 16.7, which I believe is high considering the firm's earnings are expected to fall next year. In addition, BG's valuation is more than double that of its peers in the rest of the sector, which trade at an average historic P/E of around nine.

Foolish summary
Overall, based on BG's high valuation in relation to its peers, its lower than average dividend yield, and its falling earnings, I believe that BG Group does not look safe to buy at 1,164 pence.

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In the meantime, please stay tuned for my next FTSE 100 verdict.


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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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