Nucor (NUE) is a U.S. steel giant. It is the largest steel producer in the U.S., with annual capacity of more than 27 million tons of steel. It is also the largest recycler in the U.S.
But Nucor was not always an industry leader. It started out in 1905, when Ransom E. Olds, creator of the Oldsmobile automobile, left his own automotive company over a dispute with shareholders. He would soon form REO Motor Company, which would eventually evolve into a company called the Nuclear Corporation of America—and thus, Nucor was born.
Nucor rose to prominence by taking a different approach than every other steel company. While most in the steel industry used old blast-furnace based production, Nucor pivoted toward a new technology of mini-mills. This provided the company with more financial flexibility.
The company has realized tremendous success. Nucor has increased its dividend each year for 43 consecutive years…
This makes the company one of only 50 Dividend Aristocrats – stocks with 25+ years of consecutive dividend increases in the S&P 500.
[drizzle]While Nucor’s historical dividend growth is very impressive, the company’s results over the last decade have been less than stellar.
If you listened to the recent presidential debates, you may have heard about foreign steel being ‘dumped’ onto the United States. You hear a lot about ‘Chinese steel in the media’ (and in the presidential debates) – but China isn’t even one of the 5 largest importers of steel (by country) to the United States. The top 5 are shown below, along with the percentage of total steel imported into the United States:
- Canada (19%)
- Brazil (13%)
- South Korea (12%)
- Mexico (9%)
- Turkey (8%)
Source: U.S. Department of Trade Global Steel Trade Monitor
The truth is that imported steal has hurt the steel industry in the United States (but its not China that’s doing most of the importing). Nucor’s earnings-per-share were at $5.73 in 2006. In 2015, they had declined to $1.11. In 2015, earnings-per-share did not cover the company’s dividend (but that’s very likely to not be the case in 2016).
There’s no question Nucor is riskier than the ‘average’ (which is exceptional) Dividend Aristocrat. The company does offer investors an above-average 3.1% dividend yield. Keep reading this article to learn more about the investment prospects of Nucor.
Nucor – Business Overview
Nucor operates in three core segments, which are Steel Mills, Steel Products, and Raw Materials. Nucor operates a diversified business model.
Source: Nucor Annual Report, page 24
The Steel Mill involves steel mill facilities and a steel foundation distributor. Nucor operates 24 scrap-based steel mills. Nucor has 13 bar mills in the U.S. that manufacture steel products. It also has five sheet mills that produce flat-rolled steel for the automotive, appliance, construction, and other industrial and consumer applications. Nucor also has two structural mills that produce wide-range steel beams and pilings for construction companies and other steel service centers.
The Steel Products segment produces reinforcing products. Nucor’s subsidiary Harris Steel fabricates, installs, and distributes rebar for highways, bridges, and other infrastructure. The major businesses in this segment are steel mesh, grating, and fasteners.
The Raw Materials business has a sole function, which is to lower costs. That is because scrap and scrap substitutes represent Nucor’s biggest cost. The company has a long-term raw materials investment strategy to reduce the cost structure of its core steelmaking function, which is critical to boosting profitability. This business includes Nucor’s scrap recycling operations.
Growth Prospects
Nucor has struggled over the last several years. This is the inevitable struggle of operating in a highly cyclical, commodity-based industry. In addition, Nucor is getting undercut by cheap imports from international markets. This has had a negative impact on steel prices.
Source: Nucor Annual Report, page 26
Last year, finished imports represented 29% market share, which was the second consecutive year in which imports claimed a historically high level of market share. Imports in 2015 were 27% higher than in 2013. Nucor’s average sales price per ton fell 13% last year.
This pressure from cheap imports caused Nucor’s sales and earnings-per-share to decline 22% and 50% last year, respectively.
The damage has been long-lasting. Over the past 10 years, Nucor’s earnings per share declined 80%.
The good news is that there are glimmers of improvement so far in 2016. Over the first nine months of the year, net sales declined 6%, but earnings per share rose 38%, thanks largely to 5% growth in total tons shipped to outside customers.
Competitive Advantages & Recession Performance
Nucor operates differently from other steel companies. What sets Nucor apart is the way it treats its employees.
The company has not laid an employee off in about 30 years. That fact alone speaks volumes about the company. Nucor rewards its employees based on how productive they are – giving out generous bonuses to productive employees.
This is a critical advantage the company has over its competitors.
Nucor’s primary competitive advantage is its employee compensation system. This results in more efficient and productive employees, and a more productive business in general.
However, the steel industry is one of the hardest-hit industries when the economy enters recession. The Great Recession hit Nucor very hard, as the company went from strong profitability to a loss.
- 2006 earnings-per-share of $5.73
- 2007 earnings-per-share of $4.98
- 2008 earnings-per-share of $6.01
- 2009 net loss of $0.94 per share
- 2010 earnings-per-share of $0.42
The construction industry is a large driver of steel use. When construction slows (like during recessions), Nucor’s business suffers. It is unlikely the company could survive a protracted depression with its dividend intact.
Valuation & Expected Total Return
From a valuation perspective, Nucor appears overvalued. Nucor stock trades for a price-to-earnings ratio of 20. This is slightly below the valuation of the S&P 500, which trades for a price-to-earnings ratio of 24. However, Nucor’s average price-to-earnings ratio since 2000 is 14.
At a price-to-earnings ratio of 20, Nucor stock may not be priced to buy right now. The company is struggling to grow earnings consistently. As a highly cyclical company, Nucor’s valuation could contract toward its historical average if it does not generate stronger growth.
A significant portion of Nucor’s future returns will be comprised of its dividend. The company takes great pride in its dividend track record, and management understands how important the dividend is to shareholders. Nucor currently distributes $1.50 per share, which comes out to a 3.1% dividend yield. Its dividend yield is significantly higher than the 2% average dividend yield of the S&P 500.
As a result, investors can reasonably expect mid-single digit annualized returns moving forward.
Final Thoughts
Nucor stock offers investors an above-average dividend yield. This gives it some consideration for investors who desire current income. And, Nucor is a Dividend Aristocrat, and is likely to continue increasing its dividend each year.
That being said, Nucor’s dividend increases over the past several years have not kept up with inflation. Over the past five years, Nucor has increased its dividend by 0.6% compounded annually.
The company offers token dividend increases so that it can remain a Dividend Aristocrat, but it should not be considered a true dividend growth stock. As a result, dividend growth investors may want to look elsewhere. The company has higher than average risk, is not recession resistant, and has weak performance over the last decade.
The company does not rank well using The 8 Rules of Dividend Investing due to its high payout ratio and negative growth over the last decade.
Are there scenarios where Nucor delivers tremendous total returns? Absolutely. But that would require legislative change. Nucor is not fully in control of its own destiny.
Article by Bob Ciura
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