Looking for dividends? Alliance Holdings (AHGP, Financial) and Alliance Resource Partners (ARLP, Financial) could be grand slam home runs, or they could be falling knives. At the current prices, I believe it’s worth the risk. All the big banks seem to own these stocks, but outside of Renaissance Technologies and a micro position by David Dreman (Trades, Portfolio), guru ownership is nil.
Alliance Holdings is a limited partnership that owns control of Alliance Resource Management the managing general partner of Alliance Resource Partners. Alliance began as a mining operation in 1971 and has since grown into one of the largest coal producers in the United States.
The U.S. Energy Information Administration forecasts total coal consumption will decrease by 9% in 2015, mainly as a result of a 9% drop in electric power sector consumption, but over the next quarter century U.S. consumption should grow by 0.20% annually. This is what's happened in the last five years.
While both Alliance Resource Partners and Alliance Holdings are worth buying if you’re looking for dividends and possible price appreciation, I want to focus on Alliance Resources. GuruFocus puts the fair value of Alliance Resource Partners at $61.24, a 71% margin of safety, and a 5-star rating. The stock was trading at $17.62 Monday morning.
Alliance generates close to a 40% return on equity on $320 million in net income and pounds out $446 million in free cash flow. Even if Alliance Resource never increases its distribution, its current dividend should remain intact, providing a 15% yield at the current price. Here's how it's done over the last five years, despite coal prices being crushed.
Financial Snapshot (ARLP, Financial)
Clean energy is the future and coal will definitely have even less market share going forward, but Alliance could pay out 85% of its earnings for the next decade as it remains wildly profitable. As long as the stock doesn’t go to $0 and the use of coal doesn’t go to 0, Alliance will pay back investors in less than five years and be a free and clear hold from then on. So, even if the price goes nowhere, investors would double, even triple their money by 2025.
Dividends provide a certain level of safety as long they remain sustainable. Alliance Resource Partners has secured price commitments for 2016, 2017 and 2018 of 31.9 million tons, 16.8 million tons, and 12.5 million tons. If these hold true, future earnings will hold up and the dividend will be a complete home run.
The CEO had this to say on the third quarter conference call.
“ARLP has a long track record of success as increased coal volumes have led us to 14 consecutive years of record operating and financial results. Our performance has been solid again this year as we expect to achieve another record year in 2015 for production and sales volumes…” and “Since our last update, ARLP has increased its coal sales and price commitments, buying additional 8.6 million tons for deliveries through 2019 at an average sales price of $50.21 per ton over that period.”
Today, Barack Obama and Bill Gates (Trades, Portfolio) are set to launch a Clean Energy Initiative in Paris as part of a global effort to fight climate change. Coal is by far considered the most unclean of energy sources yet makes up 39% of the U.S. electricity output, and that number is not likely to fall off for years to come, maybe decades. Alliance Resources is still the best trade in the industry.
I have no positions in either company.
