Alliance Resource Partners: The Canary in the Coal Mine

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Investors who love income-producing investments should seriously consider adding Master Limited Partnerships (MLPs) to their portfolios. MLPs come from a wide variety of industries, usually oil and gas, and pay big dividends to their investors as part of their tax structures.

Buying stock in an MLP makes an investor a ‘unitholder,’ not a stockholder; income received from the investment is referred to as ‘distributions,’ not dividends. Jargon aside, in a zero-interest rate environment, MLPs can offer yields of 6% and higher, making them extremely attractive to investors starved for yield. One of the best of them is Alliance Resource Partners (NASDAQ: ARLP).

The Best House in a Bad Neighborhood

Alliance Resource Partners produces coal, which it then supplies to utilities in the United States. Alliance operates 11 mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. Operating in the coal industry might give pause to a potential investor. It’s true that coal is under pressure, what with cheap natural gas and the prevailing push for clean energy sources such as wind and solar.  However, coal still accounts for 40% of electicity in the United States.  Furthermore, the price of natural gas won't stay at depressed levels forever, meaning utility customers may soon be incentivized to return to using coal.

In light of the turbulence surrounding the industry, coal stocks have performed brutally in recent years. Alpha Natural Resources (NYSE: ANR) has seen its market value drop by 85% since the beginning of 2011. The company has reported massive operating losses in 2012. Fellow coal miner Peabody Energy (NYSE: BTU) saw its share price decline from more than $70 per share to its current level of $25. Peabody does pay a dividend yield of around 1%, but hasn’t been able to provide investors with a dividend increase since 2010, and the dividend yield pales in comparison to the painful loss of principal investors have endured.

That being said, Alliance Resource Partners itself operates extremely well. In its 2011 annual report, Alliance Resource reported production growth of 6.6% and revenue growth of 14.5%. The year marked the 11th in a row of record financial results for the company. The company increased its distribution to shareholders each quarter in 2011, and has provided quarterly increases for the last 19 quarters in a row. Alliance Resource Partners also performed well in 2012. Third quarter coal sales grew more than 5% year over year. The company raised its distribution four times in 2012, and is on pace to raise it again in time for its payment next month.

A Great Opportunity

Amazingly, more than 95% of Alliance Resource Partner’s 2013 business is priced and contracted. The company expects coal production and sales volumes in 2013 to increase 11% to 13% over 2012 levels. Further production growth will be realized through the company’s plans to construct a new mine in southern Indiana, and is constructing a new mining complex in southern Illinois.

The company trades for 16 times trailing earnings, only 10 times forward earnings, and offers a compelling yield of more than 6%. Not only does Alliance Resource Partners offer a fantastic yield, but tremendous distribution growth as well — 13.6% compounded annually over the last five years. Alliance Resource Partners was a screaming buy below $60, but even at its current level of $63, this stock represents a compelling combination of growth and income.

Robert Ciura owns shares of Alliance Resource Partners, L.P.. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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