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Coal sector focuses on shareholder value, benefiting a handful of investors

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Coal sector focuses on shareholder value, benefiting a handful of investors

U.S. coal companies increasingly tout shareholder return initiatives such as share repurchases or dividends, but the universe of investors benefiting from these efforts is contained to just a few investment groups.

With the domestic market for coal in secular decline due to competition from other energy sources and exports representing a smaller and more variable source of demand, companies are favoring capital deployment strategies that shy away from major investments in new supply growth projects. At two of the largest U.S. coal firms, just five institutional investors hold more than or nearly half of the outstanding shares of the company, an S&P Global Market Intelligence analysis found.

"Buybacks have historically been a way that corporations could return cash to shareholders without the commitment of a regular dividend, and were generally viewed as more tax-favored than dividends," said Jeffrey Hoopes, an associate professor of accounting at University of North Carolina's Kenan-Flagler Business School. "Following U.S. tax reform, there was an increase in the total value of shares repurchased compared to the level in 2017."

Since the financial crisis of 2008, a number of companies across the U.S. economy have taken a conservative approach to investing in future growth while turning to dividends and share buybacks. Academics, analysts and others have disagreed on the direct impact this might have on innovation and growth of a company or the overall economy. In the coal sector, dwindling demand helped make investors especially wary of new projects, making shareholder return programs increasingly the norm. Contura Energy Inc., for example, rolled out a stock repurchase plan at the end of August, joining several of its larger coal mining peers in emphasizing such a program.

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Just five investors hold 51.0% of the outstanding shares of Peabody Energy Corp.: Elliott Management Corp., Contrarian Capital Management LLC, Vanguard Group, BlackRock Inc. and Susquehanna Advisors Group Inc. Elliot is the largest institutional holder of Peabody Energy shares. The activist investor bought up the debt of Peabody — the largest coal company in the U.S. — before it emerged from a bankruptcy reorganization in 2017.

"We remain firmly committed to executing on our shareholder return program," Peabody President and CEO Glenn Kellow said during a recent earnings call in which the company committed to accelerating shareholder value initiatives.

Similarly, Arch Coal Inc., is largely held by a handful of investors. Five institutions hold roughly 49.0% of the outstanding shares of Arch. That includes Invesco Ltd., Vanguard, BlackRock, Monarch Alternative Capital LP and Dimensional Fund Advisors LP.

Seaport Global Securities LLC analyst Mark Levin wrote in an Aug. 26 note that Arch executives were recently asked about the potential to moving from a "buyback-heavy model" to a focus on special dividends.

"Our sense is that the board continues to favor the more tax-efficient approach, at least for now," Levin wrote. "Given the shares' current valuation, we think buybacks make more sense than special dividends, but we were trying to see how wedded the company may be to the current approach and if it might change its philosophy were the stock to get back to ~$100/share."

The company's stock opened at $77.79 per share on Sept. 4 after falling from highs in the low $90s reached in July. The company repurchased more than a third of its original shares outstanding in the last nine quarters. Other companies in the coal sector with relatively concentrated ownership include Ramaco Resources Inc. and Consol Energy Inc.

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The top 10 largest institutional owners of U.S. coal companies in the second quarter held positions worth roughly $3.37 billion in market value, representing 31.6% of the total U.S. coal company market capitalization analyzed by S&P Global Market Intelligence. Elliot's position in Peabody, worth $678.8 million, makes it the largest holder of coal company shares without ownership in any other company in the space. Its position alone represents 6.4% of the equity investment in the U.S. publicly traded coal companies that were analyzed. Other than Contrarian and Elliott, most of the other top ten holders of coal equities held positions spread across multiple coal companies.

A number of large investment firms put their clients' money into passive funds tied to tracked indexes which would include investments in companies within those indexes. While investors may hold shares in a company through the index, it may not necessarily mean it was an active choice to support or bet on companies within that index. For many of these investors, the amount staked to the coal sector is fairly low compared to their total investments and some have separate client offerings specifically tailored to exclude or limit coal investment.

A spokeswoman with Vanguard noted that while the group does not comment on a particular company, any investment in a particular security is due to the need to closely track the underlying benchmark of its index fund, or in the case of active funds, to satisfy that fund's investment objective.

Others among the top 10 institutional investors in the coal sector either did not respond or declined a request to comment on the record.