Should Income Investors Buy Into Alliance Resource Partner’s 7.8% Yield?

One of the industries most eager to bid farewell to 2016 was coal. Demand for coal fell off a cliff, from a variety of sources including intensifying regulation, as well as a broader shift away from coal toward natural gas.

Even well-run, highly profitable coal companies like Alliance Resource Partners (ARLP) suffered.

Despite a unique competitive advantage and a long track record of success, Alliance Resource slashed its distribution by 35% last year.

Prior to the distribution cut, Alliance Resource had an enviable dividend track record. Coming into 2016, the company had raised its distribution for 29 consecutive quarters. At the time, it was a Dividend Achiever.

Note:The stock is still technically on the Dividend Achievers List, but will soon be removed.

Now that Alliance Resource has reset its distribution at a lower, but more sustainable rate, the question is whether investors should give coal another chance.

This article will discuss the current environment for coal, and Alliance Resource’s future prospects.

Business Overview

Alliance Resource isn’t your average MLP. It is a coal mining company, and was the first coal MLP.

The company operates nine mining complexes in Illinois, Indiana, Kentucky, Maryland, and West Virginia. Its production facilities are located in two coal-producing regions, Appalachia and the Illinois Basin.

It also operates a coal loading terminal, and has one mine development project underway.

(Click on image to enlarge)

ARLP Assets

Source: Annual Report, page 9

The company’s premier assets led to steady growth for many years. From 2011-2015, Alliance Resource enjoyed rising production and sales volumes.

(Click on image to enlarge)

ARLP Production

Source: Annual Report, page 11

This led to significant growth in revenue and EBITDA in that same five-year period.

(Click on image to enlarge)

ARLP Revenue

Source: Annual Report, page 11

In turn, Alliance Resource consistently raised its distribution.

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