10 Mid Caps to Rule Them All

Seeking out the 10 mid caps to rule them all is the only logical follow-up to seeking the 10 small caps to rule them all. Unlike small-cap companies that offer investors the potential for high-risk, high-reward returns, mid-cap companies usually have significantly less risk built in because of their proven business track records. These companies offer either distinctive products or exceptional value to investors – or possibly both.

For reference, here are the choices for the previous nine weeks:

For the final week of 10 mid caps to rule them all, I'd like to throw diversification completely out of the picture and highlight arguably the strongest dividend growth story of the past decade, Alliance Resource Partners (Nasdaq: ARLP  ) .

What it does
That's right, folks -- two coal stocks on one list. Alliance Resource Partners, much like Arch Coal (NYSE: ACI  ) , is engaged in the production and marketing of coal that it sells to utilities to make electricity. With coal making up roughly half of all energy generation in the United States, and with nuclear power's future seriously in question following the tragic earthquake in Japan, coal has cemented its footprint as the primary source of electricity for years to come.

How it stacks up
Dividend-seeking investors, this one's for you!

Alliance Resource Partners may not have stunning growth like many of the other names in this series, or even some of its peers, but its dividend growth is unparalleled. Let's look at how Alliance Resource stacks up next to some of its peers on both a growth and dividend basis.

Company

Operating Margin (TTM)

PEG Ratio

5-Year Annual Dividend Growth

Alliance Resource Partners 22.6% 0.97 14.1%
Arch Coal 10.8% 0.11 12.9%
CONSOL Energy (NYSE: CNX  ) 14.7% 0.94 7.4%
Peabody Energy (NYSE: BTU  ) 19.1% 0.47 7.2%
Westmoreland Coal (Nasdaq: WLB  ) 4.6% N/M N/M
James River Coal (Nasdaq: JRCC  ) 8.8% (1.20) N/M
Patriot Coal (NYSE: PCX  ) (0.1%) 6.42 N/M

TTM = trailing 12 months. N/M = not meaningful.

Patriot, James River, and Westmoreland are easy eliminations, with much smaller margins and in some cases negative future growth expectations. Peabody and CONSOL are both attractive, but being larger companies, their dividend growth and margins are stuck in the mid-to-high teens. Arch Coal makes the best comparison to Alliance Resource, and as should be no shock, I like both a lot but for different reasons. Arch Coal has Alliance handily beat based on future growth projections (mainly because Arch loves to grow through acquisitions), while Alliance boasts the best operating margin and fastest growing dividend in the sector. This time we have dual winners.

How it could make you money
If you're an income-seeking investor, chances are you've written Alliance Resource a thank-you message or three. The company has raised its dividend an impressive 25 times in the past 40 quarters, a testament to both the company's shareholders-first attitude and the strength behind the coal business. A current yield of 4.7% might not seem all that impressive considering the 25 raises shareholders have been privy to in the past decade, but also consider that the stock has more than doubled in the past two years.

Spot coal prices remain near record highs, meaning it's very unlikely that Alliance Resource's sector-leading operating margins are going to be shrinking anytime soon. Even the company's directors are standing behind the dormant value locked up in the company. Although there haven't been any insider purchases recently, there also hasn't been an insider sale since March 2010. That's impressive considering the disproportionate amount of insider selling we've seen of late.

There's arguably no stronger dividend growth story than Alliance Resource. As the final edition to the 10 mid caps to rule them all, it should bring in a handsome sum of dividend income for shareholders.

Stay tuned for the kick-off of "10 Large Caps to Rule Them All," which debuts next week.

I've called Alliance Resource Partners the energy stock to own right now: Do you agree? Share your thoughts in the comments section below and consider adding Alliance Resource Partners to your watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong  Motley Fool newsletter services have recommended buying shares of Alliance Resource Partners. Try any of our Foolish newsletter services free for 30 days. 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 that digs up the facts, one swing of the pickax at a time.


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  • Report this Comment On August 31, 2011, at 12:54 PM, Buffetisbest wrote:

    i love how arlp has a little under 400M$ in net debt yet still pays a dividend... Somehow in bad times, I don't see this company doing well

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4/17/2014 4:01 PM
ACI $5.01 Up +0.04 +0.80%
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ARLP $84.60 Down -0.35 -0.41%
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