The first, second, and third thing investors are likely to notice about Alliance Resource Partners (ARLP +2.15%) is that the stock pays a double-digit distribution yield. The next thing investors will notice is that the business makes all of its money from mining and transporting coal.
On the one hand, the company is profitable: It sold a record 40.4 million tons of coal in 2018. It has managed to comfortably cover its distribution in four of the last five years. And it even managed to stop a multiyear slide in sales last year with its highest level of revenue since 2015.
On the other hand, it's 2019. Can any serious investor with a long-term mindset really own a coal stock?
Image source: Getty Images.
By the numbers
Alliance Resource Partners mines steam coal (used for generating electricity) and metallurgical coal (used for industrial applications) from assets in the United States. It sells a range of low-sulfur, moderate-sulfur, and high-sulfur coal products. In addition to generating revenue from the direct and indirect sale of products, the business has wisely begun to wade into transportation services. That has allowed it to generate revenue from overseeing the safe passage of coal from its mines to customers via barge and rail.
That change to the business model has provided a noticeable increase in total revenue, especially after a record volume of product was sold in 2018. That said, Alliance Resource Partners has seen its business deteriorate over the years due to falling demand for coal and weakening selling prices. Investors don't have to go back that far to see the trend: The company reported $2.2 billion in coal sales and $544 million in operating income as recently as 2014. Consider how the business has fared more recently.
|
Metric |
2018 |
2017 |
2016 |
|---|---|---|---|
|
Coal revenue |
$1.84 billion |
$1.71 billion |
$1.86 billion |
|
Transportation revenue |
$112 million |
$42 million |
$30 million |
|
Operating expenses |
$1.63 billion* |
$1.46 billion |
$1.56 billion |
|
Operating income |
$372 million* |
$332 million |
$368 million |
|
Net income |
$367 million |
$304 million |
$339 million |
|
Earnings per share (EPS) |
$2.73 |
$2.25 |
$2.51 |
|
Distribution per share |
$2.07 |
$1.88 |
$1.99 |
|
Operating cash flow |
$694 million |
$556 million |
$703 million |
Data source: SEC filing. *Includes an $80 million benefit from a legal settlement.
Alliance Resource Partners has been able to cover its distribution with operating cash flow. It's distribution coverage ratio in 2018 was 1.51 times. While the company's financial performance has improved in the last five quarters, that had a lot to do with an $80 million settlement received in the first quarter of 2018. That reduced operating expenses and therefore boosted operating income and net income. Without it, operating income would have continued its multiyear slide. Investors also might want to entertain the idea that the recent production surge will be remembered as a tiny blip on the long-term radar. Simply put, coal is being phased out globally.
Coal has a climate problem
Consider that Alliance Resource Partners sold 68% of its coal to American electric utilities in 2018. However, the amount of electricity generated from coal-fired power plants in the United States declined 35% from 2009 to 2018. Accelerating retirements resulted in a further 8% decline in electricity generation in the first quarter of 2019 compared to the year-ago period. Worse yet, the U.S. Energy Information Administration counts 63 planned retirements of coal-fired power plants between now and 2027 -- and many more are likely to be announced.
While Alliance Resource Partners has increased the share of exports from 4.5% of total sales volume in 2016 to 27.8% last year, international markets are also reducing coal consumption for both industrial and power applications. China is on pace to reduce coal's share of its electricity generation from 64% in 2015 to 58% in 2020. Many countries in Europe are on pace to be coal-free by 2030. Meanwhile, the rise of low-cost liquefied natural gas (LNG) exports might prove just as devastating as any climate change policies.
Another risk is that the company's largest customer, a subsidiary of PPL Corporation, was responsible for 10.9% of total revenue in 2018. However, the parent company has committed to reducing carbon dioxide emissions 70% from 2010 levels by 2050. That requires the energy-generating company to shutter practically all 7,410 megawatts of coal-fired power plants it owns, which represent 72% of its total generating capacity and 3% of the country's coal-fired power plant fleet.
Image source: Getty Images.
Don't chase this high-yield coal stock
Yes, a 12.6% distribution yield is enticing. Yes, Alliance Resource Partners turned in a surprisingly positive performance in 2018. Yes, the stock trades at less than 7 times future earnings estimates. But investors can probably see that the coal industry is headed to an early retirement -- perhaps much earlier than current estimates suggest.
If that's not enough to peel your eyes away from the double-digit yield, then consider that this coal stock has lost 39% of its value in the last five years with dividends included. Parking your money in the S&P 500 would have returned 67%, including dividends, in the same span. In other words, you would have collected a hefty income stream by owning this stock, but lost most of your principal. That's not the point of investing. Therefore, investors should definitely stay away from this coal stock.
