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Right now, it might seem crazy to suggest investing in a coal company. After all, both the public at large and federal regulators are taking a much harsher view of coal because of its environmental and health effects. In addition, the coal industry is facing the added headwind of cheap natural gas, which incentivizes industrial users like utilities to use less coal as an input for power generation.
However, it needs to be mentioned that coal still represents more than 40% of electric generation in the United States. New regulations will make it harder for new coal-fired plants to be built, and several underperforming coal companies are in deep financial trouble.
But every industry has a leader. In the coal industry, the leader is unquestionably Alliance Resource Partners LP (NASDAQ: ARLP). Here’s why income investors would be wise to set aside their fears of coal, and take a closer look at Alliance.
Put simply, Alliance is a best-in-class company. While other coal companies are collapsing, Alliance is thriving. Last quarter, total revenue increased 3.4% year-over-year. Diluted earnings per share fell 8%, but that was due mostly to the frigid winter weather, which caused delayed shipments and rising inventory.
Importantly, management sees some of the pressures on earnings easing over the upcoming quarters. Natural gas prices remain extremely low, but as rig counts and production begins to level off in the United States, higher prices could be on the horizon. That, in turn, would be beneficial for coal prices.
According to management forecasts, Alliance is on track to earn $395 million to $455 million in net profit this year. And, the beauty of investing in Alliance is that because it’s classified as a master limited partnership, the vast majority of its income will be passed through to investors as MLP dividend income.
At recent prices, Alliance stock offers a sky-high 7.7% dividend yield. Even better, the company increases that distribution regularly – not just every year, but every quarter. It has raised its distribution for 28 consecutive quarters, and over the past five years, it has increased its distribution by 10.8% per year, compounded annually.
What separates Alliance from its competitors is its unique position as a low-cost operator. It accomplishes this through strategic geographic positioning. Its coal mines, located mostly in the Illinois Basin and Appalachia, are situated very close to its industrial end users, which leads to much lower transportation and other costs. This keeps margins very healthy.
Furthermore, Alliance displays excellent execution. Approximately 96% of the company’s 2015 anticipated coal sales are already priced and committed. This should alleviate fears about its business model.
Alliance gets a bad reputation because it’s a coal company, and as a result, the stock is extremely cheap and is a hidden gem for value investors. Units trade for just seven times trailing earnings, which presents a fantastic buying opportunity.
Meanwhile, income investors should put this company on their radars. It offers a juicy 7.7% current yield, as well as double-digit distribution growth per year. As a result, Alliance Resource Partners is an income investor’s dream.
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