Friday August 24, 2012
by Jack Adamo, editor Insiders Plus
Coal has been pulverized over the last 8 months or so due to the extremely low price of natural gas, which is a substitute energy source for power plants, and the slowdown in economies throughout the world, particularly China and India.
The company we’re interested in -- Alliance Resource Partners, L.P. (ARLP) -- looks poised to ride out this rough patch better than the industry as a whole.
Another headwind for coal in America is the Obama Administration’s pledge to make all new coal-fired power plants meet the same emissions standards as natural gas.
Given the strong and nearly equal divide between factions in this country, it will be difficult to enforce such a policy. In my judgement, it doesn’t matter who wins in November, the latest coal emissions initiative is likely to come to nothing.
Eventually, demand from China and India will pick up again and supply and demand for natural gas will come into balance at a price between $4 and $7.
It seems that coal demand will pick up somewhere in the next three years. In the meantime, the weaker players in the industry are likely to go broke or be acquired. In either case, supply will be curtailed and prices will rise concomitantly.
Meanwhile, Alliance Resource Partners already has as much coal contracted for sale in 2013 as it sold in 2011, and at similar prices.
Contracts for 2014 are pretty close to that threshold, and 2015 is well on its way. Hence, although no growth can be assured for the next few years, a big drop in earnings is unlikely. With this company, that’s fine with me.
Alliance Resource is a Master Limited Partnership. For tax reasons, that makes the units unsuitable for tax-deferred accounts like IRAs and 401-Ks.
Apart from that, I like MLPs because, like REITs, they are required to pay out most of their cash flow in dividends. And payout it does. Alliance has a current yield of 6.2%.
In the last 10 years, the company has never lowered its dividend; not even for one quarter; not even in 2008 and 2009, and more than 60% of the time it has raised it.
That’s no guarantee we couldn’t see a reduction in the rough environment ahead, but it does show that the company is well run and working for its owners. Its balance sheet is good and its cash flow is excellent. I expect it continue to thrive.
The stock is down 23% from its all-time high -- a much better performance than the industry as a whole. That’s due in part to its great dividends and in part to its solid fundamentals.
It should hold up well in the coming market slide, and to whatever extent it pulls back, you’ll gain by reinvesting your dividends, if you’re in a position to do so.
I’ve been waiting for a chance to buy this company at a discount. So, we’ll dip a toe in now and hope to get a chance to buy more later at a bigger discount.
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