While other names in the energy space have run hard and fast, this well-run mid-cap name is just starting to gain momentum.

In researching this article, my mind kept wandering back to Hank Hill, the main character of Mike Judge’s hilarious animated series “King of The Hill.” The no-nonsense Hank, while coming off as a “Bubba,” was much deeper than he appeared. He was also darned good at his job mainly because he could tell someone in one brief sentence what he did. In his own words: “I’m assistant manager at Strickland Propane, where I sell propane and propane accessories.”

Hank’s simple focus is shared by UGI Corp. (NYSE: UGI), a mid-sized holding company headquartered in King of Prussia, Pa. And like Hank Hill, there’s a lot more to the character than just propane and propane accessories. In addition to propane distribution, UGI operates gas and electric utility, energy marketing and related businesses through subsidiaries.

The utility component of UGI’s business represents about 20% of the overall mix. The footprint is relatively small, covering a little more than half a million customers in northern and eastern Pennsylvania. Nearly a fifth of UGI’s business is comprised of what is called “midstream and marketing.” The M&M business covers everything from natural gas and propane storage to an HVAC service (heating, ventilation and air conditioning) company operating in the mid-Atlantic region.

Now, as bizarre as that sounds, it’s actually a component of UGI’s strategy of increasing profits by acquiring non-utility businesses. I like that. It’s smart. It’s cheap and, if executed correctly, adds tons of value to the balance sheet which, typically, the market overlooks. And when the market overlooks, opportunities are created for smart investments.

But the real driver for this king of the hill is propane…
And propane accessories! But seriously… UGI’s core business (41%) is AmeriGas Propane; the largest retail propane marketer domestically. The company distributes through its master limited partnership (MLP), AmeriGas Partners L.P. (NYSE: APU). How big is the biggest? In 2010, the company distributed more than 1 billion gallons of propane. The remaining 20% of UGI’s revenue mix comes from international propane distribution that includes majority ownership in a large Chinese joint venture and the largest retail distributor in the Czech Republic.

The numbers are the best part…especially the dividend
At about $32 a share, UGI trades at about 13 times trailing earnings and yields 3.1%. Now, before you turn your nose up at what seems like a nominal yield, let’s dig a little deeper. UGI’s 5-year dividend growth is an impressive 47%, and the dividend has grown every year in the past 20 years. That’s a club with very few members. Currently, the dividend payout ratio is a comfortable 38%, and management is committed to maintaining a 35% to 45% payout rate. This keeps ’em honest, and honesty is always the best policy.

Management has also set a goal to grow earnings per share (EPS) by 6-10%. How are they executing? In 2010, it turned in 14.9% year-over-year earnings growth. With that kind of performance, it can continue to under promise and over deliver. Management also expects to generate $100 million to $150 million in free cash flow to be used for internal growth and acquisitions.

It takes a lot of scrutiny for a company to be even considered a “cash machine” in my book. UGI could probably fit under that column.

But there are just a couple of alligators in the swamp. The stock has been up 27% in the past year, not including dividends. Throw those in and you’re up better than 30% — more than double the S&P 500’s 14.7% return in the same period. The stock price, and subsequently the chart, might be a bit tired.

Also, on Feb. 10, a UGI gas main in Allentown, Pa., exploded, killing five people. The stock pulled back a little after the incident and some overhang from the event is likely to remain for a little while. 

Action To Take –> UGI shares are currently hovering just under $32 at 12.8 times trailing earnings and yielding 3.1%. Despite some of the apparent risk due to the stock’s run-up and fallout from the gas main incident, UGI makes sense as a solid, mid-cap core holding based on the company’s consistent dividend growth and prudent financial management. A price target of $38.20 feels about right. That’s 20% upside. Plus, as the nation grapples to find its way to an intelligent energy policy, it won’t hurt to have some high quality, natural gas exposure. You’ll also get propane and propane accessories.

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