This Coal Stock Is Paying 13.7% — Is It Worth Buying?

Searching for yield in today's stock market can be challenging — the current average dividend yield of S&P 500 companies is 1.5%.

But for those who are willing to look beyond the most popular tickers, companies with much bigger payouts exist. 

Case in point: Alliance Resource Partners ARLP is a diversified producer and marketer of steam coal to major U.S. utilities and industrial users. It pays quarterly distributions of 70 cents per share, translating to an annual yield of 13.7%.

Alliance started its mining operations in 1971. Today, it's the second-largest coal producer in the eastern United States.

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Alliance has approximately 580.7 million tons of proven and probable coal mineral reserves and 1.17 billion tons of measured, indicated and inferred coal mineral resources in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia. In 2022, it sold 35.6 million tons of coal.

Coal no longer grabs the spotlight in the investment arena. Environmental concerns, the rise of renewable energy sources and tightening government regulations have reduced coal's influence in the energy matrix.

But the industry hasn't breathed its last — just take a look at Alliance's latest earnings report.

Supporting Oversized Distributions

In the second quarter of 2023, Alliance generated $641.8 million of revenue, representing a 3.5% increase year over year.

The partnership said that its top-line growth was "driven primarily by higher coal sales price per ton, which rose by 5.7%, partially offset by lower oil and gas royalty prices."

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At the bottom line, Alliance earned a net income of $169.8 million, or $1.30 per unit — an improvement from the $163.5 million, or $1.23 per unit generated in the year-ago period.

Alliance generated $173.7 million in distributable cash flow in the second quarter. Since the partnership paid $90.9 million in distributions for the quarter, it had a distribution coverage ratio of 1.91 times.

In the latest earnings conference call, Alliance's Chairman, President and CEO Joseph Craft III said, "We plan to sustain our distribution at the $0.70 a quarter."

Alliance has also placed its bets beyond just fossil fuels.

Earlier this month, the partnership announced that it has made a $25 million strategic investment in Ascend Elements Inc., a U.S.-based manufacturer and recycler of sustainable, engineered battery materials for electric vehicles.

Upside After A Choppy Ride?

Alliance Resource stock is up 3.6% in 2023 but down 20.7% over the last 12 months.

Over the years, investor sentiment toward coal has undergone a noticeable shift. As global emphasis on sustainability and clean energy grows, some investors are viewing coal with increasing skepticism, given its environmental impact and contribution to climate change.

That said, Benchmark Co. analyst Nathan Martin has a Buy rating on Alliance Resource and a price target of $28. Considering that the stock currently trades at $20.40, the price target implies a potential upside of 37%.
Remember, dividends are not carved in stone and stock prices can fluctuate wildly. If you don't like such volatility, you might want to consider reliable income plays outside the stock market — such as investing in rental properties with as little as $100 while staying completely hands-off.

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