Alliance Resource Partners: An Intriguing Speculation that Pays you Lavishly to Wait

2015-09-04

Introduction

Currently there is probably no more controversial sector in finance than the energy sector.  The sub- industry sector coal faces even more challenges than oil and gas.  However, it is often in areas with the greatest risk where the best long-term returns can be found.

Generally speaking, I am a fervent believer and supporter of conservative investing strategies.  Utilizing strategies such as sound valuation with a focus on quality can actually produce solid long-term returns.  This is especially true for dividend paying stocks.  The combination of capital appreciation based on sound fundamental value plus the steady and growing payment of the dividend can add up to excellent total returns.

Risk is controlled in two ways. First by having a solid foundation of fundamental value underpinning your investments, and next by having a portion of your original investment returned to you by way of dividends.  Although some would argue with this statement, I believe that every time I receive a dividend payment from a stock, I have less money at risk.  In other words, I am not only getting a return on my investment, I’m also getting a return of my investment.

However, there is another aspect of the return of your investment concept that is often overlooked.  If the dividend yield is high enough, you can choose to invest in riskier assets without actually taking on excessive risk.  The higher the dividend yield you are receiving, the faster your risk is reduced.  In other words, with higher yield you can get your original investment back in a lot less time.  On the other hand, the high yield has to last long enough for that to happen.  Additionally, when looking for high yield, consistency of dividend payments or distributions is an important consideration.

Traditionally the highest yielding investments will be found in business development companies (BDCs) mortgage rates (mREITs) and master limited partnerships (MLPs).  Personally, I have never invested in BDCs or mREITs because I have found them too difficult to understand or analyze.  Additionally, for the ones that I have looked at, I have found them to be inconsistent with their distribution or dividend schedules.

Regarding MLPs, I have occasionally nibbled on them, but always only sparingly.  One attribute that has led me to occasionally invest in MLPs is the consistency of their dividend distributions.  However, I also believe that the MLP asset class is a difficult one to analyze and evaluate.

Nevertheless, there are times to throw caution to the wind and take a chance if you want to make a significant return.  Of course, I only suggest doing that with money you can afford to place at risk.  This leads me to a discussion on an investment opportunity in Alliance Resources Limited Partners (ARLP) that I am finding too intriguing to ignore.  Therefore, I thought I would share it with each of you.

Alliance Resources Limited Partners Reasons for Optimism

In the written portion of this report, I offer the following reasons why I have an optimistic view on Alliance Resources Limited Partners.  However, I do acknowledge that it is a speculation, but simultaneously not as risky as many would think.

For starters, ARLP is the dominant player in a distressed industry.  The company has a very healthy balance sheet relative to all of their major competitors.  As a result, I believe the company stands to benefit as the proverbial last-man-standing in the coal sector when all is said and done.  The company generates prodigious amounts of cash flow and their dividend (cash distribution to shareholders) is well covered.  In their most recent quarterly report, management increased their distribution by 1.9% and this marked the 29th consecutive quarter they have done so.

But perhaps most importantly, I believe the shares of this dominant coal MLP are extremely undervalued.  In my opinion, this has driven up the current yield to a level that cannot be ignored, and positions the investment for above-average long-term capital returns.  Consequently, I think the long-term total return potential is extraordinary, and the current dividend yield is paying shareholders lavishly to wait.

Note: there are several interesting articles and reports on the company on Seeking Alpha.  Therefore, I recommend following the link on F.A.S.T. Graphs™ to learn more.  In the analyze-out-loud video associated with this article, I will present what I see from the perspective of the F.A.S.T. Graphs™ fundamentals analyzer software tool.  I will also look at a few other examples of what I consider riskier high-yielding investments for contrast.

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