Another Record Quarter for This Spectacular Coal MLP

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Investors who dive into socially controversial and economically troubled industries need to have a thick skin. That’s especially true if the industry in question is coal. For a variety of reasons, coal is under fire.

Operating in the coal industry might give pause to a potential investor. It’s true that coal is under pressure with cheap natural gas and the prevailing push for clean energy sources such as wind and solar.

However, there remains a stalwart within the coal industry. Alliance Resource Partners (NASDAQ: ARLP), a Master Limited Partnership engaged in the discovery and production of coal in the United States, continues to perform excellently amidst a tough environment for coal.

Coal getting crushed

There’s no denying the fact that many of the United States’ publicly traded coal companies have crashed and burned over the last couple years. Almost exactly two years ago, Peabody Energy (NYSE: BTU) traded for $72 per share. Today, shares exchange hands for $20, representing a 72% decline in just two years.

Even worse, fellow coal producer Alpha Natural Resources (NYSE: ANR) has declined by a staggering 90% since the beginning of 2011.

These dramatic declines are punctuated by massive financial losses and deteriorating operating performance, brought on by the confluence of factors mentioned earlier. Peabody lost money in fiscal 2012, and continued to lose money in the first quarter. Last year, the company reported a $1.80 per unit net loss from operating activities. For the first quarter, the company lost $0.05 per diluted unit.

For 2012, Alpha Natural Resources recorded a huge net loss of $2.4 billion, or $11.06 per diluted share.

The canary in the coal mine

Despite the negative connotations surrounding coal and its future as an energy source, it’s worth noting that coal still accounts for 40% of electricity in the United States. Furthermore, the price of natural gas probably won't stay at depressed levels forever, meaning utility customers may soon be incentivized to return to using coal.

Even under duress, Alliance Resource Partners shows that well-run coal companies in the United States can not only survive, but thrive. In early February, Alliance Resource Partners reported promising fiscal fourth-quarter and full-year results. Even amid a difficult pricing environment for coal, the company performed admirably. Alliance Resource Partners reported quarterly and full-year revenue increases of 16% and 10%, respectively, versus the prior year. The company’s revenues set a new record, as did its tons sold and tons produced.

The partnership’s success continued into the first quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) set a record, growing 31% year-over-year. Increased coal sales volume drove revenue higher in the quarter to $548 million, an increase of 23.6% compared to the same quarter last year.

The distribution tells the story

Alliance Resource Partners' payout and operating performance simply blows the competition away. Peabody pays a paltry dividend yield in comparison, around 1%, but hasn’t been able to provide investors with a dividend increase since 2010. Worse yet, its puny dividend yield pales in comparison to the painful loss of principal investors have endured. Alpha Natural doesn’t even pay a dividend, and reported huge losses in 2012.

Alliance Resource offers investors the tantalizing combination of operating performance and rising distributions on a quarterly basis. Along with its quarterly report, the MLP raised its distribution by 2% to its new level of $4.52 per unit annualized. At recent prices, Alliance Resource yields more than 6.5%.

I’m a huge fan of both Alliance Resource’s fantastic operating performance and its generous payout. Even better, the company’s policy of increasing its distribution quarterly means those dividends will compound your wealth even faster.

I began accumulating shares of this wonderfully managed MLP last year, and due to reinvestment of those fat distributions, my cost basis is down to $55 per unit. That means that with the recent distribution increase, my yield on cost is over 8% (and will only grow in the future).

Investors who understand the time-tested portfolio strategy of buy and hold, dividend reinvestment should seriously consider adding the best coal company in America to their portfolios.

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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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