In just one more year, Nucor Corporation (NUE, Financial) will likely become a Dividend King, a company that belongs to the S&P 500 and has increased its dividend every year for the past 50 years. For now, though, it is merely a Dividend Aristocrat with only 196 consecutive dividend payments.
But what about the steel-maker’s other fundamentals? Do they justify buying for the dividend?
About Nucor
Nucor has disrupted the steel industry in several ways. Under the leadership of then CEO Ken Iverson, Nucor opened its first steel mini mill in 1969. With its electric arc furnace, the mill had advantages over the huge blast furnaces operated by competitors such as U.S. Steel (X, Financial) and the now-defunct Bethlehem Steel.
The company also melted down scrap steel to make its final products, making its products less expensive. Now, it claims it is the largest recycler in the United States.
In addition, it kept down administrative costs by flattening its management hierarchy and leaving most decision-making to front-line supervisors.
As an agile, low-cost producer, it became a stock-market darling in the last quarter of the 20th century, one that was able to generate those growing dividends year after year. Nucor is now one of the giants of the American steel industry.
The following is a birds-eye view of the company from its fourth-quarter 2021 investor presentation:
The following slide from the same presentation sums up its financial, operational and cultural objectives:
The company expects another year of “strong profitability” in 2022, as end-use market demand remains strong for steel and steel products. But will that profitability match or exceed the results for 2021, an outstanding year? As the company reported in its fourth-quarter and full-year 2021 news release:
“For the full year 2021, Nucor reported consolidated net earnings of $6.83 billion, or $23.16 per diluted share, compared with consolidated net earnings of $721.5 million, or $2.36 per diluted share, in 2020.”
Competition
Nucor produces and sells steel and metal products, and all are essentially commodities. The company reported in its 10-K that it operates in a number of markets, all of which are highly competitive. In addition, many domestic and foreign firms compete, so Nucor competes on both price and service.
The GuruFocus system names Steel Dynamics (STLD, Financial) and Reliance Steel & Aluminum (RS, Financial) as competitors. We can add long-time producers United States Steel (X, Financial) and Cleveland-Cliffs (CLF, Financial) to that list. The latter has transformed itself in the past few years, from just an ore producer to an integrated producer.
Risks
Risk factors listed in the 10-K include:
- The industry is cyclical. More specifically, it sells to cyclical industries such as commercial construction, energy, metals service centers, the appliance industry and the automotive industry. When they sneeze, steel companies, including Nucor, usually catch colds. And broader economic slowdowns also affect the steel industry as well.
- When the global industry enjoys solid economic conditions, many companies increase their capacity to take full advantage of the demand. That often leads to overcapacity, which, in turn, leads to low-cost imports and pushes down prices and the profitability of all companies in the industry.
- It is a capital-intensive business, both to grow and maintain facilities. While it covers most of its costs internally, a lack of access to new capital could be challenging.
- Access to reasonably priced energy, particularly electricity and natural gas, is ongoing.
- Taxes: Nucor reported, “The steel industry and our business are sensitive to changes in taxes. As a company based in the United States, Nucor is more exposed to the effects of changes in U.S. tax laws than some of our major competitors. Our provision for income taxes and cash tax liability in the future could be adversely affected by changes in U.S. tax laws.”
Competitive advantages
As noted above, Nucor is a nimble, low-cost producer, able to take advantage of changing environments. It also sees its supply chain as a competitive advantage because it is broad and balanced, allowing it to reduce its costs, create a shorter supply chain and have more options over its metallic inputs.
Another is human resources (or relative lack thereof). The company claims that its operations are highly automated, which means lower employment costs while providing more than 26,000 human employees with highly competitive compensation. The company usually contributes 10% of earnings before federal taxes to a profit-sharing plan for non-officer employees. It believes the additional compensation, which is paid weekly, is a powerful workforce incentive.
Financial strength
Nucor gets an eight-out-of-10 score for finanical strength, which tells us the company has a solid balance sheet and more. The high Altman Z-Score backs that up. Some other vital statistics:
- Total assets: $25,823 billion.
- Total liabilities: $11,219 billion.
- Cash, cash equivalents and marketable securities: $2,618 billion.
- Short and long-term debts: $5,684 billion.
According to the interest coverage ratio, Nucor generates enough operating income to pay its interest expenses 57.28 times over.
Further confirmation of its financial strength comes from the return on invested capital (ROIC) to weighted average cost of capital (WACC) ratio. At 43.11%, the ROIC is significantly higher than the 9.39% WACC.
After bumping slowly upward over much of the past decade, free cash flow took off in 2021:
Profitability
Nucor receives an even higher score for profitability. As the dark green bars down the industry column indicate, it handily outperforms its peers and competitors in the steel industry. Margins, returns and growth data are all strong. Here’s a historical perspective on the three growth lines for revenue, earnings and Ebitda per share:
It’s an impressive chart, but glass-half-empty investors will likely suggest that the current levels could foreshadow a future decline.
Performance
Prudent investors may also want to check out two competitors that have outperformed Nucor in recent years, Steel Dynamics and Reliance Steel & Aluminum (U.S. Steel lags badly):
The annualized returns for Nucor stock are as follows:
- Year-to-date in 2022: 3.36%.
- One-year: 96.67%.
- Three-years: 26.17%.
- Five-years: 15.65%.
- 10-years: 11.82%.
Total annual returns:
- Year-to-date in 2022: 3.36%.
- 2021: 114.61%.
- 2020: -5.49%.
- 2019: 8.63%.
- 2018: -18.51%.
The varying total annual returns highlight the unpredictable returns of steel companies.
Dividends
Nucor does pay a dividend, but it has been brought down in terms of yield by last year’s soaring share price:
Over the past five years, the dividend growth rate has averaged 2.22% per year, and the annual payment has risen to $2.00 per share. The dividend payout ratio is low at 7%.
Nucor also has made a commitment about shareholder returns: “We expect to return a minimum of 40% of our earnings to shareholders, while maintaining our strong investment grade credit profile.”
Shares
The company has also cut the number of shares outstanding by an average of 2.15% per year over the past decade:
This table shows how the shares are owned:
President and CEO Leon J. Topalian owned 90,517 shares as of June 1, 2021. The largest insider holding was that of James D. Frias, the chief financial officer, treasurer and executive vice president, who owned 300,874 shares on Sept. 23, 2021.
Valuation
As noted, the share price shot up last year:
Is the current price still too high, or is this the new normal? Its price-earnings ratio is relatively low and better than 68.83% of other companies in the steel industry. It also is low in comparison with its own history, where the 10-year median is 21.41.
The PEG ratio, which is the price-earnings ratio divided by the five-year Ebitda average growth rate of 21.30%, backs up that reasonable valuation. That provides a PEG ratio of 0.24, well below the fair value mark of 1.00.
The GuruFocus Value Line chart arrives at a modestly overvalued rating:
Because Nucor has a predictability rating of just 1-out-of-5 stars, we cannot look to the discounted cash flow calculator for an indication one way or another.
An investor who looks at the company’s price through a growth perspective will likely see a reasonable price. Conversely, another investor who looks at the company through a cyclical lens is more likely to see an overvalued stock.
Gurus
Despite the ups and downs of the stock price, the gurus have been generally bullish about Nucor in the past two years:
At the end of December, eight gurus held positions in Nucor. The biggest stakes were those of:
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management. He added 2.93% in the fourth quarter to finish with 255,774 shares.
- Richard Snow (Trades, Portfolio) of Snow Capital Management. He added a whopping 158.78%, giving him a total of 57,161 shares.
- Joel Greenblatt (Trades, Portfolio) of Gotham Asset Management. He reduced his holding by 28.74% to finish with 41,946 shares.
Conclusion
There’s no doubt Nucor is a solid company that performs well. Its high financial strength and profitability ratings show it knows how to increase shareholder value. Its growth rate also impresses, although that may change if an economic slowdown occurs.
Its valuation is trickier, with a PEG ratio indicating undervaluation, while others suggest it may be overvalued. As indicated, this may depend on whether you are a glass-half-full or a glass-half-empty investor. The cyclical nature of steel must also be taken into account.
All of which gets us to the question of whether Nucor is worth buying for its dividend. It has just one more year before it moves up from Dividend Aristocrat to Dividend King, so it is very unlikely to stop raising the dividend payment. Add to that its share repurchases, and you have a decent annual return, plus opportunities for capital gains in the long term. Of course, if you could buy on a dip, it would produce better dividends and capital gains.
