Updated on December 21st, 2021 by Bob Ciura
Coal is the most burdensome form of energy for the environment.
As a result, numerous countries are making coordinated efforts to phase out coal in favor of natural gas, as well as renewable energy sources such as solar and wind power.
As a result, coal production has steadily declined in the U.S. since the 2008 peak.
Fortunately for domestic producers, exports have remained strong due to rising demand in the emerging markets.
This has allowed several coal stocks to remain profitable, and return cash to shareholders through dividends.
With all this in mind, we created a list of nearly 100 materials stocks.
You can access all materials stocks (along with important financial metrics such as dividend yields and price-to-earnings ratios) by clicking on the link below:
Coal stocks are a subset of the broader materials sector.
While many investors have concluded that coal stocks will soon become irrelevant, this may not be true. In this article, we will analyze the four best coal stocks today.
Table Of Contents
You can use the following table of contents to instantly jump to a specific stock:
The top four coal stocks are ranked based on total expected returns over the next five years, from lowest to highest. These four coal stocks collectively represent our top picks in the coal industry over the next five years.
BHP Group (BHP)
BHP traces its roots back to 1851 and a tin mine on a small island in Indonesia, called Billiton. Today, it is an exploration and production giant in the metals and mining industry, and is headquartered in Melbourne, Australia. BHP explores, produces, and processes oil, iron ore, metallurgical coal, and copper.
The company has a diversified production portfolio. Approximately 64% of EBITDA in fiscal 2020 was derived from Iron Ore production, 19% from Copper, 10% from Petroleum and 7% from Coal.
Click here to download our most recent Sure Analysis report on BHP Group (preview of page 1 of 3 shown below):
Rio Tinto Group (RIO)
Rio Tinto Plc was founded in 1962 and is headquartered in London, the United Kingdom. It is one of the largest precious metals mining companies in the world with a market capitalization of ~$104 billion.
The company operates in exploration, mining, and production of a variety of minerals. Rio Tinto’s main segments include Iron Ore, Aluminum, Copper & Diamonds, Energy & Minerals.
We expect annual returns of 8.4% for Rio, driven mostly by its high dividend yield. We do not expect meaningful EPS growth, and only a small boost from multiple expansion.
Click here to download our most recent Sure Analysis report on Rio Tinto (preview of page 1 of 3 shown below):
Alliance Resource Partners (ARLP)
Alliance Resource Partners is the first publicly traded Master Limited Partnership and the second–largest coal producer in the eastern United States.
Apart from its primary operations of producing and marketing coal to major domestic and international utility users, the company also owns both mineral and royalty interests in premier oil & gas regions, like the Permian, Anadarko, and Williston Basins.
Finally, the company provides terminal services, including the transportation and loading of coal and technology products and services. The company generates ~$1.3 billion in annual revenues and is based in Tulsa, Oklahoma.
We expect 13.5% annual returns for ARLP, consisting of 8% annual earnings-per-unit growth and the high yield of 6.8%, partially offset by a declining valuation multiple.
Click here to download our most recent Sure Analysis report on Alliance Resource Partners (preview of page 1 of 3 shown below):
NACCO Industries (NC)
NACCO Industries is a holding company for The North American Coal Corporation, which incorporated in 1913. The company supplies coal from surface mines to power generation companies.
At 35 million tons of annual production, NACCO Industries is the largest lignite coal producer in the U.S. and ranks among the top ten of all coal producers.
NACCO Industries operates in North Dakota, Texas, Mississippi, Louisiana and on the Navajo Nation in New Mexico.
Source: Investor Presentation
The company produces annual revenues of ~$140 million in normalized conditions.
We expect the company’s earnings to decline by 2% per year, due to the steady decline of the coal industry. However, we view the stock as extremely undervalued, with a 2021 P/E of ~4.6. Our fair value estimate is a P/E of 9, implying significant undervaluation.
In addition, shares currently yield 2.4%. Overall, total returns are expected to reach 13.5% per year over the next five years.
Click here to download our most recent Sure Analysis report on NACCO Industries (preview of page 1 of 3 shown below):
Coal stocks are highly cyclical, and operate in a declining industry. Therefore, investors should keep in mind the elevated risks of investing in such a troubled industry.
That said, there are still multiple coal stocks that pay dividends to shareholders and have reasonable valuations. As a result, the best coal stocks could still generate strong returns in the years ahead.
Overall, while risk-averse and investors should avoid coal stocks in general, those who are comfortable with the risks might consider purchasing the above coal stocks.