Alliance Resource Partners, L.P.: Beaten-Down Stock Offers an 11.3% Yield
A High-Yield Stock You Likely Haven’t Considered
Out-of-favor stocks can offer some of the biggest yields, with Alliance Resource Partners, L.P. (NASDAQ:ARLP) being a great example.
ARLP stock returned a disappointing -7.9% year-to-date. And if you think that’s not much of a tumble, consider this: over the last five years, the unit price has plunged more than 45%.
However, as we know, dividend yield moves in the opposite direction to the stock price. So it shouldn’t come as a surprise that the downturn in Alliance Resource Partners stock has made it one of the most generous dividend payers in the current market.
Trading at around $18.00 per unit, the stock has an annual distribution yield of 11.3%.
Of course, whenever you see a beaten-down high yielder, it’s important to check whether the company can make enough money to cover its payout. This is because, quite often, the reason behind an ultra-high yielder’s downturn in share price is that investors don’t believe the dividend is sustainable.
As an income investor, you don’t want to buy into a company before it announces a dividend cut.
So the big question now is, does Alliance Resource Partners make enough money to cover its distributions?
Alliance Resource Partners, L.P.: Is the Payout Safe?
Before we dig into the financials, note that because Alliance Resource Partners is structured as a master limited partnership (MLP), the key performance metric is distributable cash flow. The partnership calculates this amount by taking adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) and then deducting interest expense, interest income, income taxes, and estimated maintenance capital expenditures.
In 2017, Alliance Resource Partners’ distributable cash flow came in at $420.9 million. Since it paid total distributions of $240.8 million for the year, the partnership had a distribution coverage ratio of 1.8 times. (Source: “Alliance Resource Partners, L.P. Reports Quarterly and Annual Financial and Operating Results; Increases Quarterly Cash Distribution 1.0% to $0.51 Per Unit; and Provides Initial 2018 Guidance,” Alliance Resource Partners, L.P., January 29, 2018.)
In other words, the company generated 75% more cash than what was needed to meet its distribution obligations. That was reassuring for anyone who was concerned about the partnership’s dividend safety.
In the first quarter of 2018, Alliance Resource Partners generated $88.2 million of distributable cash flow while paying out $68.4 million in actual cash distributions. That came out to a distribution coverage ratio of 1.3 times. (Source: “Alliance Resource Partners, L.P. Reports Increases to Net Income Attributable to ARLP and EBITDA of 48.6% and 28.7%, Respectively; Raises Quarterly Cash Distribution 1.0% to $0.515 Per Unit; and Increases Guidance,” Alliance Resource Partners, L.P., April 30, 2018.)
While the number does not look as impressive as last year, note that a 1.3-times distribution coverage ratio still leaves a sizable margin of safety.
Moreover, that margin of safety is expected to widen over the course of this year.
An Improving Business
You see, for full-year 2018, management expects Alliance Resource Partners to earn $407.5 million in distributable cash flow. Based on its expected total cash distribution of $277.7 million for the year, the partnership would achieve a distribution coverage ratio of 1.5 times.
Of course, while the payout seems to be safe for now, there is another question we have yet to address: Why did ARLP stock plunge so much?
Well, the drop was largely due to the downturn of its industry—coal.
Alliance Resource Partners stock started trading on the Nasdaq in 1999, making it America’s first publicly traded MLP that was involved in the production and marketing of coal.
With its mining operations beginning as early as 1971, Alliance Resource Partners has grown tremendously over the decades. Today, it is the second-largest coal producer in the eastern United States. It operates eight underground mining complexes in Illinois, Indiana, Kentucky, Maryland, and West Virginia.
If you have been following the markets, you would know that the coal industry hasn’t been an investor favorite lately. Over the last decade, U.S. coal production has slowed down quite a bit.
But Alliance Resource Partners is far from over. In fact, management recently raised its production guidance to 40.5 million tons for full-year 2018, which would be a 7.7% increase year-over-year. Moreover, the partnership expects to generate adjusted EBITDA of $640.0 million this year, up three percent from 2017. (Source: “MLP & Energy Infrastructure Conference,” Alliance Resource Partners, L.P., May 23, 2018.)
At the end of the day, keep in mind that, as an MLP, Alliance Resource Partners must distribute most of its available cash to unitholders. Therefore, if the partnership manages to grow its business, it could also dish out bigger dividend checks.
In fact, the payout has already been increasing. During the past 12 months, ARLP has raised its per-unit payout every single quarter. (Source: “Distributions,” Alliance Resource Partners, L.P., last accessed June 29, 2018.)
Bottom line: While Alliance Resource Partners, L.P. is a beaten-down stock from an out-of-favor industry, its safe 11.3% yield could still be worth a look.