Delicious Dividend: Alliance Resource Partners

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As investors, we all love dividends. After all there are not many things you can buy that will pay you just because you own them. It is simply marvelous that you are compensated for owning one of the most valuable assets in the world: An ownership stake in a successful company. That being said just because a company distributed a fat juicy dividend last quarter does not necessarily mean they are worthy of your hard earned money. But there are businesses out there who have long track records of generous distributions, able to wither even the worst of economic storms. These perennial dividend power houses are worthy of our praise and one my personal favorites is Alliance Resource Partners (NASDAQ: ARLP)

                                                                   

What they do

Alliance Resource Partners is engaged in the sales and production of coal in the eastern United States. They have 6 mines operating in the Illinois Basin (Interestingly this includes parts of Indiana and western Kentucky) as well as 2 mines each in eastern Kentucky and West Virginia. They have a whopping 706.5 million tons of proven and probable reserves.  Business is good for the folks at Alliance. Since their inception in 1999 they have never had a single year of negative net income, not a single one! Additionally they have only had negative net income growth in 2 years. In 2007, after Alliance had increased net income by over 2000% over the previous 8 years, it declined by less than 1 percent. And 2008, a terrible year for the United States economy, ARLP experienced negative net income growth of 21.25%.  It should be noted that they are, barring unrealistically fantastic Q4 results, going to have negative net income growth for 2012. But that is after 3 years that saw net income increase by 43.4% (09) , 66.8% (10) , and 21.3% (11)! But I am getting carried away with figures on net income back to the dividend...           

Advantageous Dividend

Alliance Resource Partners is structured as a master limited partnership. The government allows certain companies, almost exclusively ones with businesses pertaining to natural resources, to organize themselves in this manner in order to receive tax benefits. In exchange for these tax benefits MLPs have to pay out all of their income they are not using to maintain or grow the business, to shareholders in the form of dividends. The dividend Alliance puts in your pocket is about as generous and stable as they come. ARLP has paid a dividend in every single quarter since the company was formed in 1999. And if that was not impressive enough Alliance HAS NEVER LOWERED THEIR QUARTERLY DIVIDEND PAYMENTNot even the depths of recession could touch this dividend, from the beginning of 2008 to the end of 2009 distributions per share increased 32.48% and were increased every single quarter. The distribution has been increased every quarter since the third quarter of 2007. The very first distribution from ARLP was for 23 cents in the third quarter of 1999. The latest distribution was for $1.09, which is an increase of over 900% since the first dividend 13 years ago.

How They Compare 

The question must be asked: How does the dividend stack up against other MLPs? Dividends are certainly one of the most attractive qualities of this type of investment. While a strong 7% yield is nice, what if you can find something better? Let's take a look at some other MLPs with impressive yields and see how they compare with Alliance. Natural Resource Partners (NYSE: NRP) is an MLP whos business encompasses coal, oil, and nat gas with the majority of revenues (about 70%) coming from coal. NRP currently yields 10.6%, if you were to value dividends by their current yields, Natural Resource Partners seems a better investment than Alliance. However valuing dividends based on their latest distribution is not something a wise investor would do. You must look at the distribution history. NRP has paid a dividend every quarter since Q4 2002, since the first payout the dividend has risen about 260%. Like Alliance they have never lowered their dividend so far so good.

The story changes when you look at the last few years of NRP dividends. In the past 4 years the dividend has increased by a little over 11%. Hardly impressive when you consider Alliance increased their dividend by over 85% in the same time period. While NRP presents a heftier yield percentage wise than Alliance, their history of distributions is inferior. On top of that the TTM payout ratio for NRP is 172% while that of Alliance is 65%. You might be thinking shouldn't the payout ratio for Alliance be closer to 100%, don't they have to distribute almost all of their profits? While their corporate structure requires the vast majority of profits be distributed to shareholders,   Alliance is allowed to keep some profits, those that they deem necessary for the improvement and expansion of operations. So while they are paying a juicy dividend they still keep enough money to continuously improve their business. NRP, not so much...

Another MLP currently yielding more thanAlliance is Navios Maritime Partners (NYSE: NMM). Navios operates a fleet of 21 dry cargo (think coal, grain etc) ships. NMM currently yields 12.3%, and is yet another MLP who has never lowered their dividend. The history of the dividend is not incredibly extensive, NRP has paid distributions since Q2 2008 and has increased them by over 26% over that time period. A 26% increase may seem unimpressive compared to ARLP's gain of over 80% in the same time period. But it is typically harder for a higher yield to increase at the same pace as a smaller yield. Navios has a nice dividend but two aspects of it alarm me: They have only paid distributions for 4 years so it is incredibly hard to judge the reliability of distributions, on top of that NRR has a very high TTM payout ratio of 195%.             

Final Foolish Thought

Alliance Resource Partners has a dividend that will allow shareholders to sleep comfortably at night. While the yield of ARLP may not be quite as high as some of its MLP peers, they have an incredibly strong history of increasing dividends. Regardless of the state of the economy, Alliance has been able to increase distributions significantly and consistently. A payout ratio of 65% means that ARLP's dividend is not in any danger of slowing down any time soon. Peter Lynch, one of the greatest investors of all time (If you want to learn about one of the greats study this guy, he truly is awesome) loved companies and industries that the market hated. Coal currently is probably one of the most hated types of energy out there, but coal's economic viability is so great that it will not be abandoned any time soon. So if you are looking for a company in an industry the market despises with a strong dividend, look no further than Alliance Resource Partners.


Fool blogger Ryan Palmer owns shares of Alliance Resource Partners. Additionally this article does not give significant attention to risks associated with an investment in ARLP. As investors due dilligence must be done on risk, perhaps even more so than on potential gains. While I am very optimistic about the company's future I very much doubt they will ever again experience growth like that realized from 1999 to 2007. Fool on!

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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