Updated on January 24th, 2023 by Nikolaos Sismanis
Nucor Corporation (NUE) is the largest steel producer in North America. Despite operating in the notoriously volatile raw materials sector, Nucor is also a remarkably consistent dividend growth stock. The company has increased its annual dividend for 50 consecutive years, which qualifies it to be a member of the Dividend Aristocrats list.
The Dividend Aristocrats have long histories of raising their dividends each year, even during recessions, which makes them relatively rare finds within the broader S&P 500. With this in mind, we created a list of all 65 Dividend Aristocrats, along with important financial metrics like price-to-earnings ratios and dividend yields.
Following its most recent dividend hike, the company also joined the elite group of Dividend Kings. There are only 48 companies that qualify to be members of our Dividends Kings universe (ie, that have increased their dividends for 50 or more years), which speaks volumes when it comes to the company’s commitment to providing investors with growing payouts over time.
You can download an Excel spreadsheet with the full list of Dividend Aristocrats by clicking on the link below:
Nucor’s dividend consistency allows it to stand out in its sector and among the elite groups it is a constituent of. There are currently just 7 Dividend Aristocrats and only 3 Dividends Kings from the materials sector.
Steel is a particularly difficult industry due to the cyclical nature of the business model, which makes Nucor’s streak of annual dividend increases even more impressive.
This article will analyze Nucor’s business model, growth prospects, and valuation to determine whether the stock is a buy right now.
Nucor is the largest steel producer in North America after decades of growth. The company is headquartered in Charlotte, North Carolina, and has a market capitalization of $39.5 billion.
Nucor was not always a leader in the steel manufacturing industry. The company has a long and convoluted corporate history that can be traced back to the company’s founder, Ransom E. Olds (the creator of the Oldsmobile automobile). Olds left his own automotive company over a disagreement with shareholders to form the REO Motor Company, which eventually transformed into the Nuclear Corporation of America – Nucor’s first predecessor.
The company currently operates in three segments: Steel Mills (the largest segment by revenue), Steel Products, and Raw Materials.
Source: Investor presentation
Nucor manufactures a wide variety of material types, including sheet steel, steel bars, structural formations, steel plates, downstream products, and raw materials. The majority of the company’s production comes from a combination of sheet and bar steel, as has been the case for many years.
Nucor has been successful over the long term because of a focus on low-cost production. This allows it to maintain profitability during downturns, as well as to produce significant operating leverage during better times. In addition, it has worked to expand its product offerings to new markets, and maintain and grow its market leadership in existing channels. Over time, these principles have served Nucor very well, which is why it is the largest North American producer today.
The past several years have been volatile for Nucor and its competitors around the globe. Steel prices have been fluctuating wildly, driven primarily by a supply glut coming out of international markets, specifically China.
However, the industry’s outlook has been quite favorable lately. China’s GDP in Q4 2022 and industrial production for December both grew more than markets expected, while the termination of the zero Covid policy and considerable initiatives to stimulate construction activity is set to strengthen the property sector and, thus, the demand for steel.
In the third quarter, revenues rose 1.8% year-over-year to $10.5 billion, despite tons shipped to outside customers falling by 11% over the same period. This is due to the average sales price per ton increasing by 14% year-over-year.
Earnings-per-share came to $6.50 per share for the third quarter, compared with $7.28 per share in the same quarter the previous year.
For all of 2022, Nucor is expected to report EPS close to $29.52, compared with $23.44 per diluted share in 2021.
It’s worth noting that Nucor’s 2022 EPS is expected to see further growth from 2021’s already record levels, which had come from a much lower base in 2020 and 2019.
Nucor’s unique ability to grow dividends for 50 years, even as a commodity producer, is due largely to its status as a low-cost producer, as well as its tendency to maintain a healthy balance sheet.
Source: Investor presentation
This has helped Nucor remain profitable and grow dividends through all economic cycles while so many higher-cost commodity producers cannot stand the test of time.
Investors can get a sense of how quickly Nucor is likely to grow moving forward by looking at the company’s historical growth rates through previous cycles. Between 2001 and 2016, Nucor compounded its adjusted earnings-per-share at a rate of ~13%, even though 2016 was still a year of depressed earnings for this steelmaker.
We believe that Nucor is likely to deliver roughly 3.7% adjusted earnings-per-share growth from this point forward, although net income growth will be lumpy thanks to Nucor’s presence in the cyclical materials sector. The tremendous advancement and rebound in earnings seen in the past couple of years have created what we believe may be close to a top in near-term earnings potential for Nucor.
For the long-term, Nucor’s markets have largely favorable long-term growth outlooks. Nucor’s diversification in terms of end markets is a key driver for not only growth but also offers some relative safety when downturns strike. This helps the company perform well compared to other steel makers during recessions.
Overall, we expect 3.7% annual earnings-per-share growth over the next five years, assuming an earnings power of $5.00 in 2022. We assume an earnings power of $5.00 despite anticipating $29.52 in earnings to smooth out the volatility and account for the cyclicality of the business.
Competitive Advantages & Recession Performance
Nucor is a manufacturer and distributor of raw materials and steel. Accordingly, the company is a ‘commodity business’ – one in which the single largest differentiator between competitors is price.
Warren Buffett has the following to say about commodity businesses:
“Stocks of companies selling commodity-like products should come with a warning label: ‘Competition may prove hazardous to human wealth.’” – Warren Buffett
Certainly, commodity businesses are not the most defensive businesses, thanks to their cyclicality. This can be seen by looking at Nucor’s performance during the 2007-2009 financial crisis:
- 2007 adjusted earnings-per-share: $4.98
- 2008 adjusted earnings-per-share: $6.01
- 2009 adjusted earnings-per-share: net loss of ($0.94)
- 2010 adjusted earnings-per-share: $0.42
- 2011 adjusted earnings-per-share: $2.45
Nucor’s earnings-per-share were decimated by the financial crisis. The company is one of the few Dividend Aristocrats whose earnings actually turned negative during this tumultuous time period. Earnings have only recently caught up to their pre-recession levels, although Nucor has continued to steadily increase its dividend payments.
With all this in mind, Nucor should not be viewed as a defensive investment. Investors should expect the company to suffer during economic downturns. In addition, with steel being used as a political bargaining chip internationally, investors should be aware that the company’s fortunes aren’t tied only to its own actions but potentially also to those of external forces.
Valuation & Expected Returns
Nucor is expected to report adjusted earnings-per-share of about $29.52 in fiscal 2022, but we assume a normalized earnings power-per-share of $5.00 to smooth out the cyclicality of results. That puts the price-to-earnings ratio at ~30.8, which is significantly above our fair value estimate of 12.0. For steel producers, we remain more cautious than the general market, in part due to the volatility of commodity prices.
We see fair value at 12 times earnings, meaning Nucor is quite overvalued today. The cyclicality of Nucor’s business model means that changing which year’s earnings you use has a significant impact on the company’s valuation. Indeed, 2018’s earnings-per-share represented the top of that cycle, and thus, the stock appeared cheap at that point.
Given this, using dividend yield as a valuation metric can help to inform investors’ understanding of the valuation. The current yield is 1.3%, which is much less than its average dividend yield of around 3%.
We see negative total annual returns of -10.4% in the coming years as annual EPS growth of 3.7% is likely to be heavily offset by compression in Nucor’s valuation multiple. The contracting valuation can lead to negative annual returns of -17.2%. The yield of 1.3% is on the low side.
Nucor has a highly impressive dividend history. It recently increased its dividend for the 50th consecutive year. It has paid 199 consecutive quarterly dividends. That said, the rate of dividend growth has lagged on average over the last decade, while the most recent increase was by a modest 2%.
Nucor would be vulnerable to an economic downturn, meaning investors should consider the impact of a recession before buying shares. In addition, given the high valuation, we think investors should wait for a better price.
Nucor’s status as a Dividend Aristocrat and, following its most recent dividend increase as a Dividend King, helps it to stand out among the highly volatile materials sector. There are a handful of raw materials businesses that have multi-decade track records of compounding their adjusted earnings-per-share.
Despite Nucor featuring a long history of annual dividend increases and having a strong industry position and a healthy balance sheet, Nucor now has a lower dividend yield than the S&P 500 Index.
Overall, the stock does not merit a buy recommendation at the current price. And the company would be significantly affected by a recession. For investors who are looking for raw material exposure, we recommend waiting for a better opportunity to acquire shares of Nucor.
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