Investors looking for ways to generate reliable income may have industries like fossil fuels, consumer staples, or utilities come to mind. However, if one knows where to look, there are alternative industries that offer similar income streams as some of the better-known areas of the market for income investors. One of those areas is coal stocks.
Coal is a fuel that’s been out of favor for years in the energy sector, primarily due to its harsh environmental impact relative to other sources of fuel.
However, coal is still a sizable proportion of energy generation in the United States and other parts of the world, and in this article, we’ll take a look at the two top-ranked coal stocks for dividend investors. They are:
Top Coal Stocks: NACCO Industries (NC)
The first of our coal stocks is NACCO Industries, a company that mines a variety of products, but is primarily a coal miner.
The company operates is core coal-mining segment, along with its North American mining, and minerals management segments, respectively. Through these segments, the company operates surface coal mines under long-term contracts with power generation companies, as well as carbon producers. It also provides value-added contract mining and other services for producers of aggregates and lithium. Finally, it leases its royalties and mineral interests to third-party exploration companies.
NACCO was founded in 1913, generates about $125 million in annual revenue, and trades with a market capitalization of $190 million.
NACCO’s most recent earnings report was released on Nov. 3, 2021, and results showed an outstanding rebound from depressed conditions during the worst of the pandemic in 2020. Revenue soared 59% higher year-over-year, hitting nearly $52 million in Q3. Coal revenue was up 16% to $24 million as deliveries were up 6% to 768 thousand tons. The North American mining segment saw its volumes rise 22% to 14.1 million tons, while revenue soared 83% higher to nearly $18 million. Finally, minerals management revenue nearly quadrupled to $10 million, reflecting higher royalty income generated from newer wells in the Permian Basin.
Earnings-per-share came to $3.47 in Q3, which was nearly triple the $1.14 produced in the year-ago period. Following Q3 results, we expect decade-high earnings-per-share for this year of $6.50.
NACCO’s earnings-per-share has been quite volatile, perhaps unsurprisingly given it operates in natural resource sectors that that see volatile pricing, but also boom-and-bust demand cycles. In addition, the company’s coal business is subject to declining demand over time given demand for coal itself continues to fall. Environmental laws have made it illegal to use coal to generate power in certain parts of the U.S. and the world, and that will be a headwind for NACCO going forward.
However, its other mining and materials businesses don’t suffer from the same fate, so while we are cautious on the company’s ability to grow the coal business over time, NACCO has other options. The very high earnings base for 2021 has us estimating -2% earnings-per-share growth in the coming years.
Competitive advantages are tough to come by in mining given everyone is selling exactly the same product, and market prices are determined externally. However, NACCO’s management realized long ago that coal is not the path for the future, and hasn’t been acquiring new coal projects. Instead, they’ve been focused on maximizing existing assets’ efficiency, and investing in non-coal projects.
NACCO’s dividend safety is quite good despite the naturally cyclical nature of its business. We forecast a dividend payout ratio of just 12% for this year, potentially rising to 17% in the years to come. That should afford NACCO the ability to continue to raise its dividend, even if earnings decline somewhat, extending its current 36-year streak.
Top Coal Stocks: Alliance Resource Partners (ARLP)
Our second coal stock is Alliance Resource Partners, another diversified natural resource company that produces and markets coal.
Alliance primarily sells its coal to utilities and industrial clients, and has a relatively small oil and gas business. The partnership has ~1.6 billion tons of proven and provable coal reserves, and is less diversified than NACCO in terms of revenue; Alliance is certainly focused on coal.
Alliance was founded in 1971, produces about $1.5 billion in annual revenue and trades with a market capitalization of the same amount.
The partnership reported third-quarter earnings on Oct. 25, 2021, and results were quite strong against the year-ago period. Revenue rose 17% to $415 million, resulting from higher coal volumes, which rose 10%, as well as significantly higher oil and gas prices. Earnings-per-unit more than doubled, coming to 44 cents.
The partnership has been focused on cost controls and efficiency initiatives, and reduced interest expenses due to deleveraging. Alliance also added 15.3 million tons of new coal delivery commitments through the end of 2024.
The partnership doubled its quarterly distribution to 40 cents per unit, and we now expect earnings-per-unit to come to $1.50 this year.
Alliance has struggled to grow for obvious reasons; coal as an energy source peaked many years ago. However, coal pricing is quite strong at the moment, and the partnership’s focus on efficiency and cost controls is increasing its ability to withstand waning demand. It also enjoys significant scale in the sector. In total, we expect 8% earnings-per-unit growth in the years to come, keeping in mind 2021’s base is low on a historical basis.
Like NACCO, competitive advantages for Alliance are hard to come by in a commodity business. However, Alliance does enjoy scale, as well as strong efficiency at its operating sites. In addition, as other competitors exit the business due to waning long-term demand, Alliance stands to gain market share over time. We still see the very long-term outlook as murky for Alliance, but for the foreseeable future, it should be able to grow nicely.
Alliance’s dividend safety has been questionable at times, and the distribution has been cut repeatedly in the past decade. The current payout is just over half of earnings, so it should be sustainable for the time being. However, investors should note that Alliance has an erratic dividend policy that moves up and down over time with earnings.
Coal may not be the first sector that comes to mind for finding great dividend stocks, but with NACCO and Alliance, we find their ability to generate income for shareholders to be attractive.
NACCO offers a very long dividend increase streak, as well as a safe payout. Alliance offers a very high current yield, but less safety and a less reliable dividend.
Depending upon each investor’s individual goals, one or both of these may tick the box for those looking to generate income over time.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.