Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
NUE is trading at a discount to only 1.) above. The stock is trading at a 142.9% premium to its calculated fair value of $18.30. NUE did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
NUE earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. NUE earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 37 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
NUE earned a Star in this section for its NPV MMA Diff. of the $9,571. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as NUE has. If NUE grows its dividend at 15.0% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.4%. NUE earned a check for the Key Metric ‘Years to >MMA’ since its 1 years is less than the 5 year target.
Memberships and Peers: NUE is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Commercial Metals Company (CMC) with a 2.8% yield, Steel Dynamics Inc. (STLD) with a 1.6% yield and United States Steel Corp. (X) with a 0.3% yield.
Conclusion: NUE did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks NUE as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $130.82 before NUE’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 1.10%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.9%. This dividend growth rate is significantly below the 15.0% used in this analysis, thus providing a margin of safety. NUE has a risk rating of 1.75 which classifies it as a medium risk stock.
Like many cyclical industrials, NUE’s earnings and cash flow have struggled over the last two years. However, the company is well managed with a solid share in its markets, a very low ratio of total debt to capital percentage and a very diverse product mix. The company’s pay-for-performance and low-cost operations have helped mitigate weak demand in the most recent downturn. Longer term, industry consolidation and lower raw material costs should lead to higher earnings. The stock is currently trading well above my fair value price of $18.30. NUE is a great company, but this is not a great time to buy. NUE will remain on my watch list as I watch for an upturn in the company’s business. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in NUE (2.0% of my Income Portfolio). See a list of all my income holdings here.
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