“Dirty Secret of the Green Revolution”

By Travis Johnson, Stock Gumshoe, June 14, 2007

This email ad came in from the Motley Fool’s Income Investor newsletter, which I don’t think I’ve sleuthed before. They’re running a subscription sale right now for $119, perhaps because their lead analyst, Matthew Emmert — who did manage some pretty impressive returns — appears to no longer be running the show. The new guy is James Early, who I don’t think I’ve heard of before.

But hey, $119 is still a lot to pay if you just want an investment idea — and they’ve got an interesting one they’re teasing today.

This, while pitched as sort of a clean energy play, is actually a high sulfur coal play. The argument they provide is that new scrubber technology makes high sulfur coal usable without polluting the environment unduly, and that the increased efficiency of high sulfur coal will mean that the companies who mine it, who have long been valued lower than their low-sulfur coal compatriots, will soon see a rebound on higher use of their products. It helps that high sulfur coal in the eastern US is very close to the power plants who need it, while low sulfur coal in Indonesia is quite a ways away.

Not an unreasonable argument, in my view — we do see power plants burning “higher” sulfur coal these days with new scrubber technologies, or at least I’ve seen anecdotal evidence of this. I don’t know what the overall market looks like, but coal is still so abundant and so much cheaper than natural gas that it certainly makes sense to me that cleaner coal technologies will remain near the front burner for electricity generation.

But you didn’t come here to find out what I think — you came for the name of a company. So let’s check out their clues:

“The parent company of this New Energy Superstar is one of the largest coal producers in the eastern U.S.”

“Many of its coal operations are close to many power plants, originally designed to burn high-sulfur coal.”

They’ve got “590 million tons of high- and medium-sulfur, ‘scrubber quality’ coal”

Has industry-leading profit margins.

5.6% annual dividend.

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Massive insider/management ownership at 44%.

So … a few minutes on “liquefy” in the Thinkolator, and we get …

Alliance Resource Partners LP (ARLP)

This is a Master Limited Partnership, not unlike the “American Oil Pension” MLPs we sniffed out earlier, only this one is a coal miner instead of a natural gas or oil pipeline. There are not any standard (non-MLP) coal companies with yields approaching 5%, to my knowledge (though if you want to go to China or Canada there are a few decent yields in this space in both of those countries — Yanzhou and Fording come immediately to mind, though YZC doesn’t yield as much as it used to and FDG has the CanRoy tax problem) . Most of the big US coal companies yield less than 1%.

They do have heavy insider ownership at what looks like 42% right now, but this email cites May numbers elsewhere so the data’s probably a little bit off from today’s numbers. The dividend has dropped a little as the price has climbed, but it’s still at 5.4% today and the dividend has been hiked a couple times a year in the recent past.

The [pdf] presentation they gave at the AG Edwards High Yield Conference pretty much confirms all the teasers, including the specific size of their coal reserves, and is an interesting read if you’re going to invest in this space. As one might expect from a corporate presentation, it clearly describes how they are much better than every other major coal company. One might note that they are slightly biased — not unlike the Gumshoe telling you that stockgumshoe.com is clearly better than any other investing blog. Of course, it’s also entirely possible that both of those things are completely true.

ARLP’s operating margins blow away those of the big non-MLP coal producers like Arch or Peabody — ARLP gets about 18%, the others range around 10%.

Two other ones to look at in this space are Penn Virginia Natural Resources (PVR) and Natural Resource Partners (NRP), both also MLPs that do coal mining. PVR is also a midstream natural gas company, so the comparisons get a little more strained, but the numbers for ARLP do look a little better to me. It is certainly the smallest of the three, and it is the most efficient of the coal-only ones. NRP’s numbers look, on the face of it, significantly inferior to ARLP’s, but I certainly don’t know the whole story on either.

PVR is really the second-closest match on this, but PVR’s parent company is really an oil and gas firm, where Alliance Resources was really born of a coal company, and there was absolutely no mention in the teaser email about non-coal businesses, of which PVR has a lot. PVR’s operating margin is about 20% thanks to the midstream natural gas business, which puts it above ARLP, but they’re not really peers.

And of course, as with all MLPs the management structure is a little odd — a fair amount of the company is owned by Alliance Holdings (AHGP), which has something to do with the operating company as well and pays a smaller dividend. Check out their presentations if you want to understand this, but the higher dividend company is ARLP.

Lots of readers seem very interested in MLPs and high yielders in general, so hopefully this will provide more grist for the mill. Please share here or in the forum if you’ve got ideas on MLPs, coal companies, or dividend investing in general.



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June 15, 2007 2:47 pm

I bought some of the Canadian Royalties last year after the massive selloff and they are my best performing stocks. Some are up 30% in share price, and they pay a 14% dividend. Too bad all stocks are not this good. We would all be RICH!

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June 18, 2007 4:34 pm

Hi Engineer79,
Would you mind sharing which Canadian Royalty companies those are?


June 18, 2007 6:59 pm

Canadian Royalties and MLP’s are two different breeds. Each has tax issues and are energy related but carry different considerations. The Canadian Royalties will lose their favored tax status in three more years. MLP’s mailout K-1 forms each year and most have UBTI (Unrelated Business Taxable Income)which is a pain when held in an IRA, so only buy MLPs in your non-qualified accounts.

June 21, 2007 8:55 pm

I’m not a tax advisor or expert, but also note that you do get some of the current Canadian withholding tax back on your tax return (or at least, most people do) if you hold CanRoys in a taxable account, so holding them in IRAs or 401Ks is often disadvantageous, too.

September 1, 2007 6:00 am

The same email had the following as well. Any chance you can sleuth these 4 companies?

Four Dividend Dynasties for 2007:
Stocks for High Yield, Strong Capital Gains and Low Risk

Here are just a few of the companies we’re buying now. They’ve got excellent locked-in dividend yields and value prices that are likely to give you strong capital gains.

* The Brand Leader in Home Furnishings — at a HUGE Discount–This stock is the strongest and most recognizable brand name in the home furniture industry worldwide. It has a great dividend yield, strong cash flow and an excellent balance sheet. It’s extremely low-risk since the company has paid and increased its dividend annually for at least the past 25 years. It’s now undervalued by 30% due to the real estate slowdown. This is a huge buying opportunity that will be rewarded once the housing market turns back up.
* A Global Telecom Powerhouse Ready for a Profit Breakout — This company is the second-largest telecom company in all of Europe. It has wireless properties in many high-growth emerging market countries such as Eastern Europe and Africa. A dominant one-stop shop for landline, wireless, and Internet, this company is also the largest broadband Internet service provider in Europe. It is a huge free-cash-flow generator–$8 billion annually! Its profits are so strong it just doubled its dividend in 2006 to a 5.5% yield. Better still, the stock is undervalued by 25%. Double-digit growth in emerging markets will spur continued free cash flow growth. Yet, this company is trading at a big discount to its peer telecom companies.
* The Superstar in Natural Gas Distribution — This company runs one of America’s premier natural gas pipeline networks. It’s a very profitable, safe and stable business. 87% of its revenues are based on volume of natural gas transported, not price of gas. It been performing brilliantly for its investors with a 26.3% average annual return since 1999. Compare that with a 3.3% for S&P 500. Act now and you’ll earn a 6.3% annual dividend yield that is well-covered by cash flow. What’s even better? The vast majority of your dividends is automatically tax-deferred until you sell your shares.
* A Monopoly on ‘The 21st Century’s Most Precious Resource’ — How many companies in your portfolio are monopolies that sell a product with no known substitutes? How many provide a service that faces exploding growth, regardless of recession or inflation? You’ll get this and more in this investment. It pays a handsome dividend and is now some 26 percent undervalued. Get all the details in The 21st Century’s Most Precious Natural Resource. This special report, a $29 value, is free with an introductory subscription to Motley Fool Income Investor.

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