High-Income Contrarian Coal Play

12/06/2016 7:00 am EST

Focus: ENERGY

Jack Adamo

Editor, Jack Adamo's Insiders Plus

We're adding one position to our High Income Portfolio, and it's in a company we already own — in the coal sector, notes Jack Adamo, growth and income expert and editor of Insiders Plus.

This recommendation has nothing to do with Mr. Trump pledging to bring back coal, nor his threat to abolish the EPA. Though I suspect he may accomplish the latter, coal is on its way out, regardless.

However, that process will probably take 15-20 years, and while sales will shrink, the best run companies will do well.

We already know Alliance Resource Partners, L.P. (ARLP) is a very well-run company. This chart should show you how well-run.

chart

Yes, the stock crashed like the rest of the industry, but many of its competitors have died.

With many of the smaller, weaker players shaken out, all the survivors should do better, but due to its fine management, I think Alliance will be the leader.

ARLP’s financial and operating performance for the third quarter improved compared to the second quarter. Led by increased sales volumes, ARLP’s revenues rose 25.7% from June. Increased revenues helped drive net income higher by 8.6%.

Alliance approved a cash distribution for the quarter of $0.4375 per unit (an annualized rate of $1.75 per unit). Recent results lifted its distribution coverage ratio to 2.43 times, almost certainly the best in the industry.

That means any further cuts in dividend are unlikely. In fact, increases may resume within a year or two. In its nearly twenty years as a public company, Alliance has only decreased its distribution once.

Despite the big drop in the price of shares in the last two years, we're still in the black with our current position, thanks to the generous distributions we've received.

All that said, I am only considering rock-solid companies in rock-solid business environments until overall market valuations come down.

So, while I expect to keep the stock a long time, I won't hesitate to cut back if the market or coal encounters an obvious reversal of fortune. For now, buy Alliance Resource Partners up to $24.

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