Peter Lynch, author of One Up On Wall Street, was fond of saying that you should look for companies that are out of favour, dull or mundane. Today, there are none more unloved than coal companies. So much so that many of them are not even listed on the ASX.
These 2 ASX coal shares are well-managed, cash producing machines. At the very least, the companies are good sources for high dividend yields because of high earnings yield.
Both produce thermal coal for power stations and coking coal for making steel. As a colleague noted yesterday; the world may be turning away from thermal coal but there is simply no substitute for coking or metallurgical coal.
The largest coal company pure play
If you owned Yancoal Australia Ltd (ASX: YAL) shares by market close today, you would have secured a dividend payment equivalent to 8.7%, payable on April 29. Yancoal shares go ex-dividend on Friday.
Yancoal has a market capitalisation of $3.3 billion and a new CEO with a strong track record. The Yancoal share price has fallen by around 14% since the ASX started to react to the virus. Since listing on the ASX in June of 2012, its share price has gone from an over-inflated earnings multiple (P/E) of over 67 to a more reasonable 6.9 today.
During this time, Yancoal has enjoyed steady compound annual growth rates (CAGR) in sales, cash flow and shareholder equity. It has an earnings yield of 16.8% and delivers a steady return on capital employed of 9%. Yancoal’s average 12-month dividend yield is at 12.88%.
Yancoal is a well-managed coal company with good skills at turning capital into profit. It is currently facing headwinds in the thermal coal sector due to price downturns. Regardless, I would buy Yancoal for the dividend alone even though there is a chance of some capital growth when the market turns.
Directors increasing holdings
Whitehaven Coal Ltd (ASX: WHC) has seen 3 of its directors increase their shareholdings within the past month. This is a much-needed vote of confidence in this coal company. The Whitehaven share price fell during December after the company revised down guidance due to productivity issues at the Maules Creek mine. The Whitehaven share price is down over 30% since the market started to react to the virus.
This is another company that has seen its share price decline while its performance improved. Its 10-year compound annual growth rate (CAGR) for cash flow has been 46.9%. For earnings per share (EPS) it is 15.8% and for shareholder equity it is 13.2%. All of these are very strong figures underscoring the strength of Whitehaven’s management.
The Whitehaven share price has an earnings yield of 18.6%, indicating shares are going pretty cheap. This is helping it to produce a dividend yield of 9.35% at the time of writing.
Today, Canstar tells us that you can lock your funds away for 3 years and get 2.05%. Why would you do that when falling ASX share prices have given us dividend yields over 9%?
As an added bonus, well-managed companies like the two I’ve mentioned here also offer a chance to see a level of capital growth.
These 3 stocks could be the next big movers in 2020
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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.