A 9% Yield Found in the Coal Industry

The Environmental Protection Agency (EPA) has carpet-bombed coal with ceaseless regulations for the past decade. The latest batch were delivered earlier this month. The EPA proposed to cut carbon emissions from power generation 30% below 2005 levels by 2030.
The EPA’s target is clearly coal-powered electric utilities. Coal fuels roughly 40% of the electric utilities in the United States.
To be the target of a carpet bomber is never good for the target. Not surprisingly then, the coal industry is down, though not nearly as down as coal producers. Most have slashed or eliminated dividends.
I say “most,” but not all have slashed dividends.  One coal producer – Natural Resource Partners (NYSE: NRP) – has maintained a high distribution, despite the industry’s travails. The company’s 9% yield is three to four times that of coal producers that still pay a dividend.

How does Natural Resource Partners do it?

Business structure is a key factor. Natural Resource is structured as a royalty trust. It owns coal properties, but it doesn’t  mine them. The company leases its properties to miners and receives royalty payments on the coal mined. This keeps fixed-costs low and margins high: Natural Resource’s 63%-operating and 54%-net margins are a pipe-dream for most miners.
In addition, the company’s portfolio transcends coal properties. Twenty-eight percent of their $344 million in trailing-12-month revenue was generated by burgeoning oil & gas, minerals, and soda ash properties.  A decade ago, these properties accounted for 9% of Natural Resource’s annual revenue.
That said, coal is the focus. It accounts for 72% of Natural Resource’s annual revenue. Therefore, the company appears vulnerable, but not as vulnerable as you might think.
When it comes to coal, investors are short on perspective, having homed in on the negative. When perspective is properly directed, coal becomes much more attractive.
Now for some properly directed perspective: Coal is the second-most consumed energy source in the world. It accounts for 30.1% of all energy used, just behind the 32.9% attributed to crude oil. Coal is the go-to energy of the electricity generation. It’s also the lead energy in steel production and cement manufacturing.
Demand continues to grow: coal consumption grew 3% last year, driven by developing nations, according to data collected by British energy giant BP (NYSE: BP).
In our own backyard, natural gas prices at a four-year high have utilities shifting to coal. Within three years, coal’s share of power production is expected to clawback to 40.3% from 39% in 2013, according to the U.S. Energy Information Administration.
As for the EPA, its onerous proposal is less onerous than it first appears. Target emissions are bespoken to each state. States that create the most carbon pollution from each unit of electricity (coal-power is the leading carbon emitter) actually have the most relaxed reduction targets.
And don’t underestimate political push-back. There is a big “if” to whether the EPA can put its regulations into play. Opposition in coal-producing states, soaring electricity prices, and possible damage to the U.S. economy could force the EPA to withdrawal its proposal, or at least temper it.
In short, coal is here to stay, even if it is priced otherwise.  International thermal coal (used for electricity generation) prices have been on a steady decline since 2011, prices have fallen to an average $79/tonne from $140/tonne.
Over that same time, Natural Resource’s unit price has fallen to $15 from $35. Time to buy low in order to capture a high yield and to eventually sell high. NRP has already proven it can make money and pay a high-yield distribution in an environment clouded with uncertainty. When the clouds dissipate, so will the company’s value price.

Become a 7-Figure Investor?

It could be easier than you think. Because Ian Wyatt’s allowing a handful of readers exclusive access to the first five stocks he’s buying right now for his own account. Each one carefully selected to build the foundation for his personal 7-figure portfolio. And he’s inviting a small number of Wyatt readers to join him. Click here for complete details.