Shares of coal producer Alliance Resource Partners LP (ARLP) are down more than 23% so far in 2012. However, as shown by the chart below, ARLP has fared better than the rest of the coal sector. Popular coal stocks such as Peabody Energy (BTU), Alpha Natural Resources (ANR), Arch Coal (ACI), and James River Coal Co (JRCC) are all down significantly more than ARLP so far in 2012.
Because of its status as a limited partnership, ARLP pays out the majority of its earnings in the form of a dividend. Currently, ARLP pays an annual dividend of $4.25 per share or 7.23%. This yield compares to the rest of the coal sector where high dividend are basically non existent. For example, Peabody's 1.63% yield and Consol Energy's (CNX) 1.7% yield are about as good a yield investors can get in coal outside of ARLP. Interestingly, despite weak coal prices, ARLP reported record quarterly revenue and increased the dividend. Given this recent announcement, it is hard to argue that ARLP will be cutting the dividend anytime soon even if coal prices remain weak.
ARLP is one of the few coal companies that has more equity than debt. ARLP currently has an equity value of $2.17 billion and debt of $729 million. Comparably, Peabody, often considered one of the strongest coal companies, has $5.6 billion in equity and $6.39 billion in debt. Companies in worse share such as Arch Coal and Alpha Natural Resources have significantly more debt than equity. ARLP's relatively strong financial position has played a key role in its ourperformence.
While ARLP might be the best coal stock around, at the end of the day, it is still a coal stock. In my opinion, ARLP is the best house in a bad neighborhood. In a previous article, I talked about how I am beginning to agree with noted contrarian and value investor Wilbur Ross's view that the coal sector is not a good place to invest. However, if I was forced to buy a coal stock ARLP would be the one.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.