When it comes to high yields, it's difficult to do much better than the eye-popping 10.6% yield attached to units of Alliance Resource Partners L.P. (NASDAQ: ARLP). The coal miner and transporter is comfortably profitable and oozes with cash flow, despite operating in an otherwise dying industry. However, investors who expect the business to expand as it seemingly always has -- or doubt that coal is really in decline -- should take a few data points to heart.
The reality is that the business has failed to grow key metrics since the end of 2014. Higher production and sales volumes have been offset by lower selling prices. And global markets that have become an ally to coal are quickly moving away from the energy source. They're three signs that the high-yield stock's high-growth days are over.
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1. Operating profits are no longer growing
Historically speaking, Alliance Resource Partners L.P. had no trouble growing revenue and operating profits each and every year. From 2000 to 2014, its operating income grew from less than $9 million to more than $540 million. Revenue grew from $363 million to $2.34 billion in the same span. Unfortunately for unitholders, the growth stopped right around then.
Trailing-12-month operating income and revenue peaked in early 2015, and both have been steadily declining ever since. The silver lining for unitholders is that Alliance Resource Partners L.P. has managed the decline relatively well. Revenue has slipped at a faster rate than operating profits thanks to several margin-saving measures undertaken in recent years.
Those efforts include cost-cutting measures, increased investments in export infrastructure, and even a small amount of diversified investments into oil and gas products (which could provide up to $35 million in net income in 2018). But "falling at a slower rate" is not the same as "growing." Operating income is still on a downward trajectory -- and investors shouldn't expect it to claw its way back to the historical peak given current global market conditions. As the next two points suggest, profits will likely continue to head lower over time.
2. More American coal-fired power plants will be retired
The U.S. Energy Information Administration published a relatively rosy outlook for American coal, but its own data make it difficult to believe that the industry's steep decline will level out so suddenly, if at all.
Almost all power plants retired from 2008 to 2017 were powered by fossil fuels, with coal comprising 46% of total closures by capacity. That's hardly surprising, considering fossil fuel plants tend to be older assets, and age is one of the primary factors resulting in retirement. But when a power generator retires a coal plant, it doesn't replace it with another coal plant.
That's bad news for the industry at large, especially considering most coal-fired power plants were built before 1990. And in 2012 the average age of a coal retirement was 51 years. In other words, by 2040 the United States might only generate a few percent of its total electricity from coal, compared to 30% in 2017.
Considering the United States will retire nearly 13 gigawatts of coal-fired power capacity in 2018 (the second-highest annual total ever), there's no reason to think domestic coal demand will rebound for leaders such as Alliance Resource Partners.
3. Global appetite for coal is waning
Those expecting exports to pick up the slack for domestic coal producers might be in for a surprise. While total coal export volumes increased in 2017 compared to 2016, the amount of dinosaur pellets going international is still facing an uphill battle. Consider the volumes of coal exports in metric tons (MT) in recent years:
That trend is not exactly what investors would consider sustainable or reliable. Worse for Alliance Resources Partners, the largest markets for American steam and metallurgical coal are fast becoming the largest markets for American liquefied natural gas (LNG). That's not a coincidence. These countries are trying to balance price, pollution, and power potential when weighing their options. More often than not, cheap American LNG acquired in long-term contracts wins out over steam coal.
In other words, it's much more likely export data from 2017 and the expectations for 2018 will be a minor blip in the longer-term decline of coal, not a sign of a recovering or stabilizing market.
A profitable coal stock that is slowly shrinking
On one hand, Alliance Resource Partners runs a profitable business that produces more than enough cash flow to cover its incredible double-digit yield. On the other hand, it's all relative. Revenue, profits, and cash flow are all declining from their historical peaks. The operational performance of the last several years is quite a departure from the business's historical upward trajectory, and I think there are enough signs to declare that this company's high-growth days are over.
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