Wednesday, March 23, 2016

Collateral Learning

Once in awhile when you're evaluating a stock for purchase, you find something that reminds you that investing is not just about numbers. When you invest, if you do the research that you should be doing, you learn more about the world and various sides of business that without researching you would never have run into without luck. This is because when you start to research a company, you have to really research it. You have to look into the various sides of the business, how they make their money, what affects that income, and if that income will continue. This means you have to understand every side of their business and in that way understand another side of life that you wouldn't normally.

This happened to me just last night when I was digging into ARLP (Alliance Resource Partners L.P.). Their insanely high dividend yield caught my eye and I saw that they were very much on discount. The thing that I liked even more was that their income just kept rising, year after year, without fail. When I normally run into that sort of thing, it means good things for the future. Even though the payout ratio was way over 100% which would normally turn me the other way and running at full speed, it was hard to think about not throwing some money at it because it almost seemed like a sure bet with their income constantly on the rise that they would eventually level that out.

Everything looked to be supportive of a company that would be what I would refer to as a sleeper company. It appeared to be a company that would not be worth much now but far down the line would be worth its weight in gold and more! After all, the company had already raised dividends for 13 years straight. This is where the deeper research came in. By further digging into the business itself, I dove into the coal business. Before researching this, I would have no reason whatsoever to learn about the business of coal. Coal however was the means by which the company is currently making money. This means that the future of coal is the likely future of the business.

The problem then came to light. I finally figured out why so many investors who had so recently valued the company so highly had decided to run for the hills and abandon it. Where coal is currently a great resource for energy, it is currently being far outpaced by natural gas. Even though natural gas is technically more expensive, it burns more efficiently so more energy is harnessed from it. It also emits about half as much CO2 as coal does. This means it is more environmentally friendly and that's definitely where the whole world is headed with as many regulations are being pumped out monthly. This means that even though coal is still the largest producer and product in the US for energy, its time is likely coming to an end in the short future.

As a dividend growth investor and also a value investor, my eyes are set towards the future. With that being said, I obviously won't be tossing my money at the company any time soon because even though they are at a discount right now, the company seems to be heading towards an untimely doom. The point however that I wanted to drive home with this article was that even though I may not be investing in the company, we as investors pick up information about the world through the companies that we research. It's unintended as a bi-product but it's cool and unique at the same time. Not many other things in life give you the abundance of knowledge that investing does.


  1. DR,

    This is an excellent piece. Dividend investors could learn a great deal from your advice. It is imperative that we, as dividend growth investors, learn to think in terms of the future and less on the present.

    The coal example used within your story really hits home. On one hand, you have an entity trading at what appears (at first glance at least) to be fairly undervalued. Yet through critical thinking and analysis, you were able to determine that the underlying business itself is heading towards an inevitable downward spiral.

    As a result, you were able to avoid the costly mistake that so many of us have made in the past but hope to never replicate in the future. Although we will always make mistakes, your tips will certainly help people make fewer of them moving forward. On the flip-side, a deeper analysis into a company's future could also help an investor uncover tremendous value during times when investors are apprehensive.

    Thanks for sharing.


  2. Studying the long term goals remains one of the biggest challenges for dividend growth investors. Where does this challenge lead them to? It's another story altogether.