Nucor Corporation: Dividend Stock Analysis

Nucor Corporation (NUE) and its subsidiaries engage in the manufacture and sale of steel and steel products in North America. It operates in two segments, Steel Mills and Steel Products.

Nucor Corporation is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 34 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 14.70 % to its shareholders. This year however the stock is down about 40% as the commodity boom seems to have dried up the demand for materials, including steel, across the globe.

At the same time company has managed to deliver an 24.20% average annual increase in its EPS since 1998.

The ROE has increased from 13% range in 1998 to 30% by 2007.

Annual dividend payments have increased by an average of 39.70% annually over the past 10 years, which is much higher than the growth in EPS. Nucor’s last quarterly payment of $0.52/share consisted of $0.32 of regular dividend and $0.20/share in supplemental dividends.

A 40% growth in dividends translates into the dividend payment doubling almost every 2 years. If we look at historical data, going as far back as 1973, NUE has actually managed to double its dividend payment every four years on average. The last major dividend raise was between 2005 and 2006 when dividends increased by a whooping 475% in one year, helped by increased demand for metals worldwide. After this major move total dividends paid have actually decreased by 15% mainly because of a decrease in the supplemental dividends.

If we invested $100,000 in NUE on December 31, 1998 we would have bought 9249 shares (Adjusted for two 2:1 stock splits in 2004 and 2006). In March 1999 your quarterly dividend income would have been $300. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $5806 by September 2008. For a period of 10 years, your quarterly dividend income would have increased sixteen times. If you reinvested it however, your quarterly dividend income would have increased over nineteen times!
Investors should proceed with caution in the future as such dividend growth rates are definitely unsustainable given the recent collapse in commodities prices and talk about deflation and depression.

The dividend payout has slowly increased from upper twenties to high forties over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


I think that NUE is attractively valued with its low price/earnings multiple of 5, a not too high DPR, as well as an above average dividend yield at 5.90% (3.80% if you only count the base dividend). The current dividend yield is way above average for this stock which could compensate for the lower expected growth in company’s fundamentals or even be a warning sign that Nucor’s dividend is in danger.

I do believe that NUE is an attractive buy candidate on dips below $32, since it adds some further diversification exposure to a dividend growth portfolio. Since Nucors main business, steel is a highly cyclical business I would proceed in purchasing NUE stock cautiously. Over the next few years I wouldn’t be surprised if this stock retraces all of its gains during the 2003- 2007 bull market and ends up below $20/share.

Disclosure: None

Comments

[stay strong:]

You are kidding right?? Please tell me you are kidding? NUE under $20??? I would put my entire savings and retirement money on NUE if it goes under $20

2008 Oct 30 12:51 PM

[Money Penny:]

I will not be surprised, if it goes low 20s. It is a well run company and hence I will be a buyer.....

2008 Oct 30 02:50 PM

[Tbeau2:]

Nucor is the most diversified and best ran steel company i the US. You will never see it fall under $20. Your knowledge of The steel industry is obviously very poor.

2008 Nov 03 09:51 PM

[Nikhil:]

never say neverr again, FCX , a darling of many was at 127 and is now trading at 18 bucks, US steel is down from 196 to 24. In this environment its not just about how well you run the company when the demand dries up you have to cut production and wait and nobody saw the metal price crashing the way they did, everyone is catching up on cutting production, so < 20 is a possibility you cant rule out. Adn agreed its diversified, in times of panic everythin falls and correlation tends to 1 in all asset classes, so diversification benefits are reduced. Can you give facts , numbers why you think it cant go under 20.


On Nov 03 09:51 PM Tbeau2 wrote:

> Nucor is the most diversified and best ran steel company i the US.
> You will never see it fall under $20. Your knowledge of The steel
> industry is obviously very poor.

2008 Nov 20 10:09 AM