A Near 7% Yield With Quarterly Increases!
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've written before about Alliance Resource Partners (NASDAQ: ARLP) and the company's strong history of both earnings and dividend increases. With this much talk as there's been about the challenges in the coal industry, this company appears to operate in a class of its own. At current prices, the stock offers a nearly 7% yield and the company has increased this distribution for 17 consecutive quarters. The best news for investors is, Alliance Resource already has contracted better sales for next year. Let's take a look at the company's most recent earnings report, and you'll see just how big of an opportunity this stock represents.
The struggles of the coal industry should be no secret by this point. Companies such as Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) have seen drastic cuts in their expected earnings growth. The two biggest problems in the coal industry are the price of natural gas, and continuing concerns about the pollution from coal-fired plants. However, natural gas prices have increased from their lows, and international demand for coal seems to continue to be strong. In particular, a recent story out of China, says that nation will spend $156 billion on infrastructure. This gave a recent boost to coal stocks as coal will see higher demand from this increase in steel production. Probably the biggest difference between Alliance Resource and its direct competitors has to do with the company's dividend payment, and consistent earnings growth.
Peabody Energy in particular, has seen its earnings growth forecast cut from over 20% to a current expected rate of just over 10%. While the stock does sell for a relatively cheap P/E ratio, and the company has beaten earnings estimates in 3 of the last 4 quarters, this drastic decrease in expected growth has left investors nervous. Arch Coal is expected to lose money in both 2012 and 2013, and analysts only expect 5% earnings growth thereafter. In addition, Arch had to cut its dividend, which generally is a sign of financial trouble. Compare these results to Alliance which has increased its dividend for 17 straight quarters, and its expected earnings growth of 7%, and you can see why investors should potentially pick Alliance versus the other two. While the company's most recent earnings were not as impressive as in the past, the company's fundamental business is still very strong.
With revenues up 15.7%, and EBITDA up 6%, Alliance turned in a respectable quarter. Several positive developments have occurred, with operations commencing in mid-May at the company's Tunnel Ridge mine and the completed acquisition of the Onton No. 9 mine. In addition, Alliance continues to make progress at Gibson South and White Oak development projects. What was particularly interesting, was the company's statement that not only were coal prices up, but volumes increased as well. In an industry that is supposedly facing fundamental challenges, you wouldn't expect increased prices and increased volumes. Two other positive factors were, the company sold 5.82% more tons than they produced, and the company expects inventories will trend lower throughout the balance of the year. With lower inventories expected across the coal segment, this should help stabilize pricing which would be a benefit to all coal producers. One thing that should benefit Alliance in particular is the company's commitment to contracting long-term production sales.
Alliance targets long-term commitments for production, and has contracts as far out as 2018. For full year 2012, the company expects sales of 35.2 to 36.4 million tons of coal. What should be reassuring for investors is the company already has 36.1 million in committed sales for 2013. What is equally impressive is, the company also has committed sales of over 29 million tons of coal sales for 2014. One of the primary attractions of the stock is certainly their distribution.
With an almost 7% yield, many investors would be happy just collecting the distribution. Longer-term the company has more than covered its distribution with its free cash flow. Setting aside investment expenses to get the White Oak development underway, I would expect this will continue in the future. While most companies increase their dividend once per year, Alliance has been increasing their dividend each quarter. The company continued this trend with a current quarter increase of 3.7%. Considering that the stock sells for under 9 times its 2012 EPS estimates, and analysts are calling for roughly 7% growth, the stock appears fairly valued. However, Alliance has beaten earnings estimates in 3 of the last 4 quarters by an average of 8.1% per quarter. If the company continues this trend, earnings growth could come in higher than analysts expect.
The argument for investing in Alliance is relatively straightforward. The company pays a high yield, is reasonably valued, and has already contracted sales next year that would beat this year's numbers. Though the coal industry has its challenges, Alliance is in a class of its own.
MHenage owns shares of Alliance Resource Partners, L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.