The dust from it causes a deadly lung disease… anthracosilicosis. It’s dirty, smelly and dangerous to mine, and anyone who has ever heated their home with it – and I am one of them – hates it.
The media thinks it’s dead and the White House wishes it would disappear, but it isn’t going anywhere. In fact, the world can’t function without it… coal.
The world needs coal. Even the United States, despite the president’s best efforts, has to have it to generate electricity. Last year, 37% of our electric power came from coal.
In the emerging markets, especially China, coal is the fuel for power generation and industry.
It isn’t going anywhere.
A Contrarian Play
While a recent slowdown in emerging economies has resulted in a temporary drop in demand for coal, it has only added to the value of one coal play.
Let’s look at Walter Energy (NYSE: WLT).
The coal miner lost money last year and will continue to lose almost as much next year. Earnings were a loss of $3.65 per share in 2013 and will barely bounce up in 2014 to a loss of $2.20.
Revenue is a little better. It hit $1.86 billion in 2013 and is expected to move to $2.02 billion in 2014.
Growth for the past five years has been awful… negative 2.2%. The next five years are expected to show growth of 8% annually.
Nine out 10 stock buyers won’t even consider a play with numbers like these. But this is the perfect situation for a bond.
Unlike stocks, where we need the news and a lot of numbers moving in our direction to make money, the only thing we need with a bond is for Walter Energy to be in business when its bonds mature.
That’s it. As long as it is paying its bills, the bondholders make money. In this case, lots of money!
Walter Energy has a bond with a coupon of 9.875% that we can buy for $0.88 on the dollar ($880 for a $1,000 bond). The CUSIP is 93317QAH8.
If you shop around, Walter Energy has bonds selling for as little as $0.80 on the dollar. But this 9.875% bond offers more reliability, so I’d pay a bit more for it.
The bond matures in December of 2020 and, no matter what we pay for the bond, it will pay $1,000 in principal at maturity. That means we will have at least a $120 per bond capital gain.
But here’s how the total return looks…
We will receive 14 interest payments of $49.37 through December of 2020 for a total of $708.86 and $120 in capital gains at maturity.
If all we do is hold this bond to maturity our annual total return is 12.526%.
The income from this bond alone is 11.22% annually. (That’s the coupon of 9.875% divided by our cost of $880.)
There is a call on this bond in December of 2016 that, if called, would drive our yield to as much as 16.63% a year.
16.63% a year! From a bond! That’s a real return.
And as good as that sounds, the coal market is expected to improve in 2014. As Walter Energy’s fundamentals improve with it, this bond will move up in market value and we could very easily sell it before maturity for a much higher annual return. The only thing we need to happen is for Walter Energy to pay its bills. That’s it!
The stock can stay in the cellar forever. The earnings can disappoint. Revenues can underperform. Growth can be awful and the White House can continue to slam coal all it wants.
As long as Walter Energy is able to pay its bills – which, despite the horrible market it’s had for the past two years, has not been a problem – we get paid every penny of our interest and $1,000 in principal.
This is what I call a buying opportunity. The best in 2014!
Bonds can give your portfolio stability, predictability and reliability unmatched by other investments. And with returns of 12.52% to 16.63% a year, they can provide you with a lot of money, too.
Get to know bonds. They will get you to and through retirement.
– Steve McDonald
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Source: Wealthy Retirement