By Reuben Gregg Brewer
June 9, 2019 - Coal miner NACCO Industries (NYSE:NC) has a market cap of just $350 million, but it has done something that has eluded many of its larger peers: It has avoided bankruptcy and all of the pain that accompanies those court protections. That includes continuing to pay a dividend, with increases (adjusted for spinoffs in 2012 and 2017) in each of the last 34 years. Can it keep the streak alive?
A Rough Business
The coal industry is littered with bankruptcies. Industry giant Peabody Energy is an easy example, though Cloud Peak is the most recent to stumble. Along the way, there have also been numerous dividend cuts, including a fair number of dividends that disappeared entirely. Peabody cut its dividend before going bankrupt, but even Alliance Resource Partners, one of the strongest performers in the coal group, trimmed its distribution at one point.
That makes the 34-year streak of dividend increases at NACCO stand out. On the surface, it looks like that's not the case, because NACCO adjusted its dividend lower in 2012 and 2017 when it spun off a materials handling business and its houseware operations, respectively. However, when you take those adjustments into consideration, the dividend has continued to climb.
In fact, the most recent dividend increase was an impressive 15% hike announced in May. That's not out of the ordinary; the company's annualized dividend growth rate over the past decade (not including the recent hike) was a little over 10%. With the troubles in the coal industry, how has NACCO managed to achieve such a unique streak?
A Solid Company
One of the strengths of NACCO's operations is that it focuses on operating mines located next to or very close to the power plants they serve. These types of mines usually have long-term contracts in place with the power companies to which they sell coal. This relationship makes sense, since the mine's only customer tends to be the power plant located next door. And for the power company, low transportation costs usually mean the coal from the local mine is the cheapest available option. This focus, meanwhile, provides a fair amount of consistency to NACCO's business, assuming that power plants don't get closed down.
Additionally, a large portion of NACCO's coal business is operating mines for others. The costs of those mines largely fall on the owner, making this piece of NACCO's business highly profitable. It only owns and operates a couple of mines itself. So it is even further insulated from the ups and downs of the coal market, again, assuming that the power plants it serves continue to operate.
In addition, NACCO is pretty conservative financially. At the end of the first quarter, long-term debt was just 3% of the capital structure. Companies with low levels of debt usually don't end up in bankruptcy court. The trailing-12-month payout ratio, meanwhile, was a tiny 11%. While the dividend yield of 1.5% isn't going to excite anyone, it doesn't look like there's much need to be worried that NACCO is either going belly-up or that it is supporting a dividend it can't afford.
How long can this last? The quick answer is that the power industry is still in flux. There is a very real reason to be concerned that NACCO will change course on its dividend at some point as more and more power comes from non-coal sources (like solar and wind). Although it has a solid coal business, electric power companies are increasingly shutting down coal-fired power plants. That's why so many coal companies have been driven to cut dividends or, worse, fallen into bankruptcy. But NACCO isn't only dependent on coal.
The company also owns a limestone mine in Florida (which isn't particularly profitable) and oil and gas lands that it leases out to others (the royalties from these arrangements are very profitable). To put some numbers on this, the coal business had revenue of $16.75 million in the first quarter, generating an operating profit of $7.6 million. The non-coal mining business (largely limestone) had revenue of $10.78 million, but an operating profit of just $32,000. That number can jump around, but the business is generally much less profitable than the coal or oil and gas leasing operation, which had revenue of $12.69 million and operating profit of $11.67 million in the first quarter.
Coal is an important business, but it isn't the company's only focus. Nor is it the most profitable part of NACCO's operation. It's worth noting that the dividend in the first quarter amounted to roughly $1.2 million, which suggests that NACCO could probably support its dividend payment with just its highly profitable oil and gas business.
Is This Coal Stock Worth Owning?
NACCO is not your typical coal company, but that's part of the allure, here. With a strong balance sheet, diversified operations, and a highly profitable oil and gas business, dividend growth investors would do well to take a close look at this company if they are interested in the out-of-favor coal space. It's not a pure play, but that's been a good thing so far. And while the dividend yield isn't going to impress you, the opportunity for dividend growth might surprise you.