Alliance Resource Partners (ARLP)

We’ll stick with the energy sector, but take a look at coal. Despite the social and political push toward ‘green’ energy, most electricity in the US, and indeed, in the world, is still generated from coal-fired power plants, and coal is also essential in the production of steel from iron. In short, this is a fuel that’s not going away any time soon – and Alliance Resource Partners, which operates in Appalachia and the Illinois basin, is the second largest coal producer in the eastern US, operating as a major supplier to both utility and industrial customers.

Alliance has had a profitable year, and seen its revenues grow to record levels. The top line in 3Q22 came to $628.4 million, up more than 51% year-over-year. The increase in revenue was driven by a 40.5% increase in coal prices, which pushed coal sales revenues up y/y from $188.3 million to $550.6 million. Alliance also earns royalties on oil and gas holdings, and reported $35.5 million in revenue from that source – up an impressive 75.6% y/y.

At the bottom line, Alliance also saw strong gains. Net income rose from $57.55 million in 3Q21 to $164.61 million in 3Q22; looking at diluted EPS, the bottom line grew from 44 cents per share to $1.25, a jump of 184%.

The company’s stock has done well on the strength of Alliance’s top and bottom lines, rising by almost 80% in 2022, even in the unsettled market conditions we’ve been facing.

Solid revenues and earnings supported Alliance’s dividend, which was increased in the last declaration by 25%, from 40 cents per common share to 50 cents. The new, higher, dividend was paid out on November 14. At the annualized rate of $2 per common share, the dividend gives a yield of 9.17%. This yield is well above the average, and well above inflation. Alliance Resource has kept up a reliable dividend payment since 2001.

Nathan Martin, 5-star analyst with Benchmark, has looked under the hood at Alliance and sees reasons for optimism on the company’s ability to maintain its high-yield dividend return going forward.

“Full-year 2023 is expected to be another record year with a heavily contracted book, additional production of up to 2M tons, and average coal pricing still anticipated to be ~$10/ton higher y/y…. Given this cash flow visibility, the board approved a 25% q/q increase in ARLP’s quarterly distribution to $0.50/unit, exceeding the prior targeted 10%-15% increase. The company is also investing in growth, both organically with additional reserves at River View and Tunnel Ridge to help maintain ARLP’s low-cost position,” Martin explained.

Heading into next year, Martin rates ARLP shares a Buy, along with a $28 price target, indicating his confidence in a gain of 28.5% on the one-year horizon.

While this coal producer hasn’t picked up a lot of analyst attention, all 3 of the recent analyst reviews on the stock are positive, making the Strong Buy consensus rating unanimous. The shares are priced at $21.79 and their $28.67 average target implies ~32% upside potential in the next 12 months.