Is There an Exception to the All-Coal-Stocks-Are-Dead-Money Belief? And With a Giant Dividend?

There’s been very little good news for coal companies lately, and not much reason one might expect better any time soon. Cheap natural gas is stealing away many big customers, and new environmental regulations are costing coal others. General economic malaise keeps major burners like steel manufacturing sidelined. But for investors, these are not good enough reasons to completely ignore a 6.9% dividend yield from a coal company.

To be clear, the dividend yield in question, from Alliance Resource Partners (ARLP), is quite variable. As a master limited partnership, it’s required to spin out most of its profits to unit holders (shareholders) every quarter as distributions (dividends). Unlike shareholders in corporations, MLP investors are stuck with a tax bill for the distributions. But in most recent years, Alliance Resource’s payout has made the tax bill more than palatable. The company has added to the required payout when necessary to keep the distribution growing for 17 consecutive quarters, and the latest dividend yield puts it just short of 7%.

ARLP Dividend Chart

ARLP Dividend data by YCharts

ARLP Dividend Yield Chart

ARLP Dividend Yield data by YCharts

The company’s investors have made out well on its share price too, nearly tripling their gains between 2009 and the end of last year. They began to fall this year, like those of just about every other coal company in the country -- as seen here in a stock chart featuring Alliance, Alpha Natural Resources (ANR), Peabody Energy (BTU), Walter Energy (WLT) and Arch Coal (ACI).

ARLP Chart

ARLP data by YCharts

For the most part, this is no typical cyclical low for those stocks. Natural gas, a commodity made abundant and cheap by new drilling techniques, is stealing away coal’s biggest customers. Power companies and manufacturing plants have spent a lot of money lately switching to gas-fired operations.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

US Electricity Net Generation From Coal in All Sectors Chart

US Electricity Net Generation From Coal in All Sectors data by YCharts

This gorilla of a problem has made it difficult for coal companies to survive the ordinary lulls of the business. Steel production, which uses a certain kind of coal, is off worldwide because of economic recessions. The recent warm winter cut demand just when the companies needed it most. Coal companies have cut thousands of mining jobs in the past year.

All of this makes walking away from a coal company investment today quite understandable. But unless you’re opposed to coal on environmental considerations, Alliance Resource and its very big payout is worth a closer look. It’s a $2.2 billion market cap company with a stronger balance sheet than anyone in the business and record revenues in recent reports. With its share price battered with the sector, YCharts Pro gives it excellent marks for share price value.

The comfort features that Alliance offers investors that other coal miners don’t are two-fold: contracts that insure sales, and cash flow (paired with low-ish debt) that can keep shareholders happy. The company is essentially sold out of coal in 2012, even with new mines coming online. It’s about 90% of anticipated volume sold for 2013. Alliance CEO Joseph Craft believes that rising natural gas prices will soon bring the big customers back to coal, particularly if gas prices breech $3.50/btu again.

ARLP Free Cash Flow TTM Chart

ARLP Free Cash Flow TTM data by YCharts

Long term, the future of any coal company remains uncertain. There’s an awful lot of natural gas in storage now, and many disagree with Craft’s optimism for a sustained gas price rise in the near future. Tougher environmental regulations make mining coal more expensive. So Alliance isn’t exactly standing out as a buy-for-life investment worthy of traditional value investing. But it is giving us a few good reasons to check it out, for now.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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