Coal prices are soaring. Coal miners are experiencing boom times. Is there a way to invest in an S&P/ASX 200 Index (ASX: XJO) share and get exposure to this without directly owning a coal miner? There is, which I'll get to in a minute.
Coal is not exactly a new energy source. Yet, the resource is seeing record prices. That's because countries are paying big bucks to try to attain sources of energy for what could be a tricky next few months as the northern hemisphere goes into winter.
With Russia shutting down a key pipeline that transports gas to Europe, there could be even stronger demand for coal in the coming months.
ASX 200 shares like Whitehaven Coal Ltd (ASX: WHC) and New Hope Corporation Limited (ASX: NHC) are benefitting from the strong coal prices. This is resulting in big profits and large dividends for shareholders.
But what if investors don't want to directly buy a coal miner, but are still wanting to benefit from the strong coal price? I think there's an answer.
It's through ASX 200 share Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
The investment conglomerate has been operating for over a century. Its long-term investment strategies have meant that it has been able to ride a few different trends.
Soul Pattinson's key coal exposure
At the time of writing, the investment conglomerate owns 39.9% of New Hope.
A key part of New Hope is its Bengalla operations. Despite being impacted by weather and COVID-related shortages, Bengalla performed "strongly" in FY22. Saleable coal production was only down 3% compared to FY21.
In its latest quarterly update, New Hope said that:
Given the unprecedented demand for Bengalla's high-quality product, the focus for FY23 is to prepare for an increase in current production levels. This supports the view that demand for high-quality, low emission thermal coal will remain strong, and coupled with Bengalla's position on the cost curve, the benefit to the company is significant.
A warmer than expected northern hemisphere summer increased coal burn, with customers now focused on replenishment of stock before the onset of winter. Australian domestic coal demand particularly in NSW continues to be very strong, and the company has sold further coal into the domestic market in addition to existing contracted domestic supply. With security of supply paramount into our key markets, our forward sales book remains heavily sold in the coming 12 months.
How this can benefit shareholders
Every half-year, Soul Pattinson declares a dividend for shareholders. The cash the ASX 200 share uses to pay the dividend comes from its portfolio of assets. These include shareholdings such as New Hope, TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW) and Macquarie Group Ltd (ASX: MQG).
In the six months to 31 January 2022, which was before the Russian invasion of Ukraine, Soul Pattinson generated $182.6 million of net cash flow from its investments. It generated $153 million of regular profit after tax. New Hope's dividends were $23.2 million of this, and the upcoming New Hope dividends could be much larger than that.
In other words, a sizeable portion of the Soul Pattinson dividend is currently funded by dividends from New Hope's coal mining.
However, the ASX 200 investment share isn't paying out 100% of its cash flow as a dividend, so some of the New Hope dividend could be saved and reinvested into more opportunities.
In the FY22 half-year result, Soul Pattinson had a dividend payout ratio of its regular operating cash flows of 57.32%.
Share price snapshot
Since the beginning of 2022, the Soul Pattinson share price has dropped 15%, while the New Hope share price has risen 146%.
