Alliance Resource Partners: A Cheap Stock with a Dividend Kicker

I believe Alliance Resource Partners (Nasdaq: ARLP  ) has the right mix of value and income to soundly beat the market over the long haul.

After all, Vanguard Windsor Fund manager John Neff used that same value-plus-income strategy to beat Wall Street by three points per year for 30 years. That's a lifetime of great returns!

Whether you're new to dividend stocks or a grizzled veteran, Neff's secret formula remains relevant today. Here's how I used it to find Alliance Resource Partners.

A one-two punch of powerful investing
Neff looked for opportunities using his total return ratio, given below:

(Analysts' expected earnings growth rate + dividend yield) / price-to-earnings ratio

According to Neff, a company whose total return ratio was 50% greater than that of the overall market stood a good chance of beating that same market, by offering a better value, a higher yield -- or both!

Today, the market has a total return ratio of roughly 0.95. (I used a Shiller P/E of 20.1, a yield of 2%, and two-year estimated earnings growth of 17.2%.) Thus, stocks with total return ratios greater than 1.43 could have market-beating potential.

Using Neff's criteria, the table below clearly shows that Alliance Resource Partners offers more opportunity than its competition:

Company

2-Year Growth Est.

Yield

P/E

Total Return Ratio

Alliance Resource Partners

23.2%

6.1%

11.5

2.55

Alpha Natural Resources, Inc. (NYSE: ANR  )

54.6%

0%

83.2

0.66

James River Coal Co. (Nasdaq: JRCC  )

(4.5%)

0%

9.3

(0.48)

Source: Capital IQ, a division of Standard & Poor's, and author's calculations.

The Foolish bottom line
Neff's total return ratio combines value and income, letting you profit from multiple expansion while collecting big, bad dividend payments along the way. And as Neff showed, value and income can collectively deliver market-beating returns. Neff's total return ratio may just be a starting point. But with a total return ratio of 2.55, Alliance Resource Partners certainly looks like a cheap stock with a dividend kicker.

Income Investor advisor James Early has a newsletter full of dividend opportunities like Alliance Resource Partners. Discover all of his promising picks with a free 30-day trial.

Million Dollar Portfolio associate advisor David Meier does not own shares of any of the companies mentioned. Alliance Resource Partners LP is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2010, at 9:37 AM, QwertyHero wrote:

    Dude - you should at least TRY to change a sentence or two in your articles... If the only thing you change is the name of the stock - people are going to catch on eventually.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1279044, ~/Articles/ArticleHandler.aspx, 11/28/2014 2:02:01 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement