Coal's Most Attractive Partnership
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The coal industry has come under constant scrutiny because seemingly everyone wants to move towards cleaner energy. The reality is, while coal is cheap and plentiful, the majority of the world will still use this fuel. Not long ago, I did a search on Motley Fool's stock screener looking for companies in this unloved sector. I wanted a company that paid at least a 4% dividend and had over 10% expected EPS growth. Looking through the results I came across Alliance Resource Partners, L.P. (NASDAQ: ARLP). When it comes to coal production and marketing I've been hard pressed to find a better company. Let me show you what I've found.
Current Price: $74.75
P/E on '12 earnings: 9.85
Growth expected: 11.44%
PEG: 0.86
Yield: 5.30%
Total Return Expected: 16.79%
Off 52-week high: -12.07%
Long story short, you are getting a company at 12% below its 52-week high, for less than its expected growth rate and an over 5% payout. Purists can fret over the fact that these are partnership distributions and not a traditional dividend like other stocks. The fact is, in the last nine months of 2011, Alliance produced about $216 million in cash flow and paid out about $160 million in dividends. We learn from this that not only is the dividend safe, but the company isn't borrowing money to make its payout. There might not be a stronger argument for Alliance than its dividend increase record. The company doesn't increase the dividend each year like many do. Instead, the company has been consistently raising the payout every single quarter. If fact, the company has increased its quarterly payout by nearly 13% annually for the last five years. With revenue growing at about 13%, and EPS growing at over 20% for the same five-year time frame, you can see this is a company with sustainable earnings.
In light of Alliance's competition how does it fare? Yahoo Finance lists competitors such as Peabody Energy (NYSE: BTU), Arch Coal (NYSE: ACI), and CONSOL Energy (NYSE: CNX). The full post comparing Peabody and Arch Coal can be found here. What I found in this prior post was both Peabody and Arch have superior growth rates, but lower dividends versus Alliance. In the battle between Peabody and Arch, the winner was Peabody with a more realistic growth rate, and better balance sheet. I still think that Peabody is a good value, but its less than 1% dividend just can't compare to Alliance at over 5%. In my search of companies in the coal industry, only Alliance has the combination of good revenue growth, EPS growth, and an attractive dividend.
Of Alliance's competitors the only one I had not researched was CONSOL. Let's compare them to Alliance. CONSOL sells for $37.26 and has a forward P/E of 13.85. The company's expected growth rate is 22.28%. Where Alliance dwarfs CONSOL is dividend yield. CONSOL pays a dividend of just 1.3% versus 5.3% for Alliance. In addition, I find the future earnings growth for CONSOL to be a little hard to believe. CONSOL has been growing at about 11% and analysts expect this to double to over 22%. Alliance on the other hand has been growing earnings at nearly 20% and this is expected to drop to about 11%. It's unlikely that CONSOL's earnings growth would double while Alliance's earnings growth would be cut nearly in half. The real numbers are likely somewhere in the middle.
As you can see, Alliance has a lot going for it. Rarely do you find a company growing revenue at 13%, earnings at 20% and its dividend at 13%. Since this dividend is being raised every quarter you get a nice increase every three months on your effective yield. To give you an idea of the power of this increase, you could have bought Alliance in the middle of 2008 at a near-term high of about $44. Your effective yield with the current $0.99 quarterly dividend would be 9%! If there is a better value in the coal partnership area I haven't found it yet. I am placing my green thumbs-up CAPScall on ARLP today. This isn't a formal recommendation, just a starting point for your own research. Let me know what you think once you've had a chance to check out this dividend dynamo for yourself.
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