Coal is one commodity that people love to hate.
Admittedly, the coal industry has had some issues, ranging from
mine safety to potential links to global warming. Still, when it
comes to generating the power that lights our homes and businesses
(and often heats them too) coal continues to lead the way. Annual
production is growing, according to the U.S. Department of Energy,
and the country's exports also continue to rise.
As this EIA chart shows, coal generates nearly half of our
country's electricity - and that's not expected to change much in
the decades ahead:
To play this strength, investors should consider exposure to
coal in their portfolio. One potential option is
Penn Virginia Resource Partners L.P. (
a limited partnership that's mostly mining in the Appalachian
region. The stock is worth a look, not only because the company
carries less risk then a pure coal mining company but because the
stock is currently yielding a dividend north of 7 percent.
In 2010 the stock rose 42 percent, out-performing the
Dow Jones U.S. Coal Index (DJUSCR)
which was up 33 percent. Recently PVR has sold off to a level that
brings it back to where it was in the beginning of November,
potentially opening the window for investors to start establishing
This company is not your typical coal mining operation.
Penn Virginia, which has a market cap of $1.36 billion, doesn't
own a mine or a natural gas well. It's a limited partnership that
manages, via leases, coal and natural resource properties and
processing stations for natural gas. This substantially reduces the
company's exposure to risk from harvesting the commodities, while
keeping cash flow high.
The company owns or controls approximately 804 million tons of
proven and probable coal reserves in Central and Northern
Appalachia, the San Juan Basin region of New Mexico and in Southern
Illinois. The partnership contracts with mining companies to dig it
up - or, for natural gas, to drill the wells. Penn Virginia is a
midstream producer of natural gas, with gathering systems in the
Southwest, Pennsylvania and Wyoming.
In 2010, the partnership's lessees produced 34.5 million tons of
coal from its properties and paid coal royalties revenues of $130.3
million, or an average royalty of $3.78 per ton.
For the full year, Penn Virginia reported a 16 percent increase
in operating income to $125.9 million, three-quarters of which came
from the coal and natural resource management business. Net income
for Penn Virginia grew 9.3 percent to $43.1 million, or $0.83 per
Of particular note for high yield investors, the cash
distributions from limited partnerships like Penn Virginia can
offer better dividends than many stocks, or fixed income
For example, Penn Virginia's quarterly cash distribution is
currently $0.47 per unit, equaling a yield of 7.2 percent, and has
steadily increased over the years. Considering that the average
dividend yield of an S&P 500 stock is less than 2 percent,
partnerships such as Penn Virginia offers some obvious advantages
in terms of total returns.
This partnership also just completed an acquisition that should
enhance value for shareholders: On March 11, it finished the deal
Penn Virginia GP Holdings L.P. (
, which had held a small interest in PVR. Given the recent sell-off
in the stock, it's worth looking closer at this transaction.
However, it's important to also point out that many stocks have
fallen from recent highs in recent weeks, so this acquisition is
not the only thing moving shares.
Income investors should add Penn Virginia to their watch lists
and look for shares to find buyers as that fat yield becomes too
nice to pass up. Remember to always complete your own due diligence
before buying any shares.
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