Recent times have not been kind to the coal sector. Coal prices have dropped due to two factors: the increase in regulatory scrutiny of coal by the EPA, and the low price of natural gas, which has compelled power plants to favor natural gas ahead of coal and switch accordingly.
Alliance Resource Partners, L.P. (NASDAQ:ARLP) was not immune to the issues facing the coal market, and have taken measures in response to these issues. In November last year, it cut production at its higher cost mines and cut 260 jobs. In April, they cut their dividend by 35.2%.
Does this mean that Alliance Resource Partners is a poor investment candidate? Not really. The dividend cut was helpful in enabling Alliance to reduce its total debt to total capital ratio from 78.67% to 42.99%, so the prudence of that move cannot be questioned.
The dividend yield currently sits at 6.99%, which is striking considering the 35.2% cut. Furthermore, the revenue and net income figures over the past five years suggest that this dividend is sustainable, especially now that the total debt to total capital ratio has been lowered.
|Year||Revenue ($)||Net Income ($)|
|2011||1.84 billion||389.35 million|
|2012||2.03 billion||335.37 million|
|2013||2.21 billion||393.49 million|
|2014||2.30 billion||497.23 million|
|2015||2.27 billion||306.20 million|
The MLP has two other advantages which make it stand out as an investment in the coal sector. First, its mining complexes are located in Illinois, Indiana, Kentucky, Maryland, and West Virginia, where most of their customers are situated. This ensures that transportation costs are at a minimum.
Second, the bulk of Alliance Resource Partner's mining operations are based in the Illinois Basin, with eight out of eleven complexes extracting thermal coal from the area. The economics of this coal mining are much more robust than those of other coal mining operations in the country, which is illustrated by the revenue and net income figures outlined above.
In conclusion, while Alliance Resource Partners is trading only 3.56% below its 52-week high, it is a secure bet in a troubled sector which is trading in the mid-$20 range with a price-to-earnings ratio of 12.81 and a forward P/E ratio of 14.03, which is at a significant discount to the S&P 500 (NYSEARCA:SPY).
DISCLAIMER: I am not a financial professional and accept no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.