Investment Column: Buy-backs brighten BG prospects

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The Independent Online
The 250,000 Sids who sold their British Gas shares after this year's demerger may well have breathed a sigh of relief yesterday. BG, the successor pipeline and exploration business, announced it was slashing its dividend by more than a third. The cut in the interim from 6.4p to 4p will be followed by a similar reduction in the final payout, bringing total dividends for 1997 down to just 8p, compared with 14.5p under the old regime.

Shocks are always best absorbed with a little good news thrown in and BG surprised no one yesterday by revealing plans for a pounds 1.3bn share buy- back, worth 30p a share. The complex capital restructuring which comes with the buy-back, a path already trodden by Southern Electric and Yorkshire Water, means all shareholders from Sid to the City will benefit equally.

So after a turbulent year for investors, is there any long-term prospect of improved income from BG? The short answer is yes, with the caveat that the one-off cut in the dividend - forced on BG by the big reduction in pipeline prices recommended by the Monopolies and Mergers Commission - means the shares will never be quite the same yield stock they were in the old British Gas days.

For a start, the rebased dividend should be inflation-proof, given that the new five-year pipeline price formula to be agreed with the regulator is index-linked. On top of that, the substantial turnaround in BG's exploration and production business, now running in the black, could mean further upside for the dividend. Better still, there remains the long-term possibility of further buy-backs. Prudence will dictate a waiting game, but the group's strong cash flow could yield more pleasant surprises. Meanwhile any Sids who still hold Centrica shares, the demerged gas supply business, could also see buy-backs later next year. The improving outlook should bring profits at BG to pounds 782m for 1997. Despite the recent price rises, the shares, down 10p at 258.5p, still look attractive on a forward yield of 3.9 per cent.