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<\/a><\/p>\nAnd savers and investors are absolutely starved for options that provide income \u2013 especially as sovereign rates around the world go negative.<\/p>\n
Record Low Yields from All Income Sources<\/strong><\/span><\/p>\n The safest long-term investment on the planet is meant to be the 30 Year U.S. Treasury\u00a0\u2013 but it\u2019s only yielding 2% \u2013 an all time low.<\/p>\n Treasuries hardly provide any income \u2013 today they are a place to park money for institutions that have no other option.<\/p>\n They aren\u2019t for investing or for income.<\/p>\n If you think that bonds are the answer for income a person could always look to corporate or even junk bonds.<\/p>\n But I wouldn\u2019t\u2026.<\/p>\n Yields on investment grade companies are miniscule.<\/p>\n Junk bond yields do not nearly compensate for the risk involved.<\/p>\n I just saw a small-cap homebuilder offer 7 year unsecured bonds that have a yield of 4%.\u00a0 That is where we are\u2026\u00a0a small-cap company in a heavily cyclical business can borrow at 4% on an unsecured basis.<\/p>\n I\u2019d rather stick my money in a tin can and bury it in the backyard.<\/p>\n Perhaps we can travel outside of North America and buy some safe Government bonds with a decent yield. More than a third of bonds that trade globally now have NEGATIVE INTEREST RATES.<\/p>\n There are now almost $20 trillion European Government bonds with negative yields. All bonds issued by the Government\u2019s of Germany, Denmark, Finland and The Netherlands sport negative yields.<\/p>\n I saw an article where a bank in Denmark is even offering a negative rate mortgage \u2013 sign me up for that one please\u2026.<\/p>\n This is a bizarro world where the borrower has to pay the lender for the privilege of lending him money.<\/p>\n Outside the world of bonds\u2026\u00a0blue chip dividend paying stocks are no better.<\/p>\n The stock prices on the best businesses on the planet have been bid up so much that the dividend yield on the S&P 500 is now just 1.88%.<\/p>\n That isn\u2019t an income stream\u2026\u00a0that is a dribble.<\/p>\n Coal Is Dirty \u2013 But the Money from That 15.4% Yield Isn\u2019t<\/strong><\/span><\/p>\n This week I read a note from Goldman Sachs that confirmed what I already believed.<\/p>\n Cyclical companies with abnormally high dividends are out of favor (just look at the MLP space in the US!).<\/p>\n According to Goldman the valuation gap between high and low dividend stocks is the widest it has been in 40 years.<\/p>\n Goldman\u2019s obvious conclusion is to buy high dividend paying stocks.<\/p>\n Well\u2026\u00a0they don\u2019t come with a much higher dividend than Consol Coal LP\u2019s 15.4% current yield.<\/p>\n With a yield that high the market clearly is pricing in a dividend cut.<\/p>\n The analysts that follow the company don\u2019t agree \u2013 they think it is sustainable for at least the next three years.<\/p>\n So does Greenlight Capital\u2019s David Einhorn.\u00a0 Consol Coal is currently the fifth largest position in Greenlight\u2019s portfolio.<\/p>\n Einhorn is pretty savvy.<\/p>\n He publicly predicted the collapse of Lehman Brothers months in advance of its happening by documenting holes in the bank\u2019s accounting.<\/p>\n He has also compounded money for two full decades at a rate of almost 15% annualized.<\/p>\n When I did some digging I found that Consol\u2019s distribution looks pretty secure too.<\/p>\n Consol Coal LP owns a 25% interest in the Pennsylvania Mining Complex (PMC). The other 75% of PMC is owned by Consol Energy (CEIX) which also serves as operator (and owns 60% of CCR\u2019s shares).<\/p>\n PMC is estimated to contain roughly 770MM tons of high-Btu coal reserves.<\/p>\n There is absolutely no disputing that the PMC is a world class coal asset.<\/p>\n These are three low-cost, modern and non-unionized mines that operate in close proximity to the East Coast utilities that purchase from them.<\/p>\n The coal itself is also highly desirable with high heat and low sulphur content.<\/p>\n Higher heat means more energy, and lower sulphur reduces the costs to burn the coal, making it more attractive to utilities. The mines have the capacity to produce up to 28 million tons a year for a long time without needing to spend much cash to keep production going.<\/p>\n Consol has aggressively pushed costs down in recent years with the implementation of zero-based budgeting (where every expenditure has to be justified rather than starting with a baseline budget).<\/p>\n Northern Appalachia coal currently trades for just under $50 per ton.<\/p>\n For CCR\u2019s distribution that coal price works just fine.\u00a0 The coverage ratio in Q2 was 1.2 times. Net leverage is only 1.6x.\u00a0 And by the way, with only 16 million shares out, any increase in natgas prices would see this stock go WAY up. (Coal prices compete against natgas.)<\/p>\n The current quarterly distribution of $0.51 has been in place since the beginning of 2016.\u00a0 The price of Northern Appalachia has been between $40 and $50 per ton for much of that time \u2013 never lower.<\/p>\n For all of 2017 coal prices were similar to where they are today and CCR\u2019s dividend held.<\/p>\n What has the market concerned is that the current trend for the price of coal is down.\u00a0 But given that the price hasn\u2019t been sub $40 in more than a decade those concerns for the next couple of years seem probably overblown.<\/p>\n Especially since coal inventory levels are actually on the low side.\u00a0 As of the end of May U.S. electric power sector coal inventories were lower than they have been since 2014.<\/p>\n Further securing the near term distribution is the fact that 95% of 2019 and 80% of 2020 Consol\u2019s coal sales are already contracted with customers\u2026\u00a0more than half of which locks in better pricing than the spot rate today.<\/p>\n For the very long-term however the crystal ball is cloudy.\u00a0 And the risks are clearly higher.<\/p>\n Shale gas has taken a huge chunk of coal\u2019s market share.\u00a0 In 1997 53% of electricity in the United States came from coal \u2013 last year the number was 28%.\u00a0 Coal and natgas pricing are competitive \u2013 so if natgas prices keep going lower, coal could too.<\/p>\n However, I would point to two factors:\u00a0 One is that coal producers are much smarter at shutting in production than natgas producers.\u00a0 Two is \u2013 as I said, CCR has contracted prices for the next couple years.<\/p>\n With its low cost production Consol is going to be one of the last men standing \u2013 but if the natural gas producers keep pushing prices down everyone is vulnerable.<\/p>\n Perhaps even worse, if a Bernie Sanders or Elizabeth Warren type nominee comes out of the Democratic Party and wins\u2026\u00a0then some radical measures targeting coal could arrive very quickly.<\/p>\n Which creates uncertainty \u2013 which of course the market hates.<\/p>\n Economically, that 15.4% yield that appears quite sustainable for the near term.\u00a0 Politics could undo that next November. (Love him or hate him, I\u2019ll bet a steak dinner Trump gets re-elected though.)<\/p>\n So there are definitely risks involved in owning CCR \u2013 but IMHO nowhere near the risk that a 15% yield is pricing in.<\/p>\n EDITORS NOTE<\/strong>:<\/span> \u00a0I’m about to alert subscibers to an arcane oil trade that gives investors the best of both worlds \u2013 yield and capital gains.\u00a0 All the volatility has played right into this trade \u2013 get it as the same time as\u00a0subscribers for just $5 for the first month CLICK HERE<\/a><\/p>\n<\/a><\/p>\n
\nPerhaps not!<\/p>\n<\/a><\/p>\n