Dividend Kings in Focus: Nucor Corporation

Published on December 29th, 2022, by Samuel Smith

The Dividend Kings are a selective group of stocks that have increased their dividends for at least 50 years in a row. We believe the Dividend Kings are among the highest-quality dividend growth stocks to buy and hold for the long term.

With this in mind, we created a full list of all the Dividend Kings. You can download the full list, along with important financial metrics such as dividend yields and price-to-earnings ratios, by clicking the link below:

The newest member to join this list is Nucor Corporation (NUE), an American steel giant that has successfully navigated the significant cyclicality and foreign competition facing the industry over the years in order to consistently grow its dividend and create value for shareholders.

This article will discuss the company’s business overview, growth prospects, competitive advantages, and expected returns.

Business Overview

Nucor is headquartered in Charlotte, North Carolina and is a giant in the steel industry as the largest publicly traded US-based steel corporation based on its market capitalization. The company currently operates in three segments: Steel Mills (the largest segment by revenue), Steel Products, and Raw Materials.

The steel industry is notoriously cyclical, which makes Nucor’s streak of 50 consecutive years of dividend increases even more remarkable. The company faces challenges from international competitors. Some countries (including China), subsidize their steel industry, making steel exported to the United States artificially cheap. In 2018 the United States placed a 25% tariff on imported steel for all countries except Canada and Mexico, which has helped combat this for Nucor and its competitors.

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 due to its focus on low-cost production. This allows it to maintain profitability during downturns and produce significant operating leverage during better times. In addition, it has worked to expand its product offerings to new markets while maintaining and growing 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 two years have been phenomenal for the company, with profits soaring to record levels. Nucor generated $36.5 billion in revenue along with record-setting earnings per share of $23.44 in 2021.

Source: Investor Presentation

On October 20th, 2022, Nucor reported third quarter 2022 results. Consolidated net earnings per diluted share stood at $6.50, down from $7.28 in the year-ago period, revenue increased 1.8% year-over-year to $10.5 billion, and net sales increased 2% year-over-year to $10.5 billion from $10.3 billion in the year-ago period.

The average sales price per ton decreased 3% quarter-over-quarter, but increased 14% year-over-year. Total shipments to outside customers stood at 6.4 million tons, down 11% year-over-year. Total steel mill shipments decreased 10% year-over-year. Meanwhile, pre-operating and start-up costs related to Nucor’s growth projects were approximately $52 million, up from approximately $36 million in the year-ago period. Overall operating rates at the company’s steel mills in the third quarter fell to 77% from 96% in the year-ago quarter.

We now expect the company to earn $29.52 per share for fiscal 2022, which would be a new all-time record for the company.

Growth Prospects

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 a year of depressed earnings for this steelmaker.

We believe that Nucor is likely to deliver roughly 5.4% annualized normalized earnings power per share growth over the next half decade, although bottom line growth will be lumpy thanks to Nucor’s participation in the cyclical materials sector. The massive rise and rebound in earnings seen in 2021 and 2022 has created what we believe may be close to a top in near-term GAAP earnings for Nucor. As a result, we expect GAAP earnings to decline significantly in the coming years from $29.52 this year to just $6.50 in 2027, but the underlying normalized earnings power of the business to increase meaningfully from the current estimate of $5.00 per share. The factors driving the enormous earnings of 2021 and 2022 are simply unsustainable.

For the long-term, Nucor’s markets have a largely favorable growth outlook. Nucor’s diversification in terms of end markets also offers some relative stability when downturns strike. This helps the company perform well compared to other steel makers during recessions.

Nucor is also investing in growth initiatives that include harvesting new revenue synergies, improving operational and supply chain efficiencies, and expanding the businesses’ product offerings and geographic footprint. On top of that, the company has invested aggressively in share repurchases in recent years, buying back 71 million shares since the end of 2017 and reducing the shares outstanding by 20% in the process. This helps to grow its normalized earnings power per share over the long-term as well.

Source: Investor Presentation

Competitive Advantages & Recession Performance

Nucor is a manufacturer and distributor of steel, which – like the vast majority of raw materials businesses – is fundamentally a commodity product and therefore subject almost entirely to price as its sole differentiator.

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 few Dividend Kings whose earnings actually turned negative during this tumultuous time period. Nevertheless, Nucor’s strong balance sheet enabled it to continue to steadily increase its dividend payments.

With all of 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 Total Returns

Nucor is expected to report earnings-per-share of $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 power ratio at 27.1, which is significantly above our fair value estimate of 12.0. For steel producers we remain more cautious than the general market, in no small part due to the volatility of commodity prices.

As a result of our modeling assumptions, 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.

Given this, using dividend yield as a valuation metric can help to inform investors’ understanding of the valuation. The current dividend yield is 1.5%, which is much less than its average dividend yield of around 3%.

We see negative total annual returns of -8.2% in the coming years as annual EPS growth of 5.4% is heavily offset by a declining valuation multiple. The contracting valuation could lead to an annualized total return headwind of -15%. Meanwhile, the yield of 1.5% is on the low side.

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.

Final Thoughts

Nucor’s status as a Dividend King helps it to stand out among the highly volatile materials sector. There are very few raw materials businesses that have multi-decade track records of compounding their dividends and adjusted earnings-per-share.

Nucor has a pretty average dividend yield when compared to the broader stock market, but the company has a long history of annual dividend increases. Nucor also has a strong industry position and a healthy balance sheet.

However, the stock does not merit a buy recommendation at the current price given its lofty valuation multiple and the company would likely be significantly hurt in the short-term by a recession. For investors that are looking for raw materials exposure, we recommend waiting for a better opportunity to acquire shares of Nucor.

The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors: