While analyzing my retirement portfolio, I noticed that Nucor (NUE) is up 11% so far this year. Being a highly cyclical stock, this is not too unusual behavior. However, industrial stocks such as Caterpillar (CAT) +7.81% and China Yuchai International (CYD) +15.09% are also rising. This led me to perform a more thorough analysis of NUE's cyclical growth performance based on the possibility of Chinese sales. China is a major producer of steel and has flooded the global market during their lowered growth period of the last several years. They have changed their government and may begin major infrastructure improvements utilizing large amounts of steel. In August 2011, I included NUE in my dividend growth stocks perfect for retirees series and purchased my first tranche.
Nucor is the largest recycler of any material in the United States. They are highly efficient and have developed a process called Direct Reduced Iron detailed by Smart Equity's recent article. "Nucor Corporation, together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. It operates through three segments: Steel Mills, Steel Products, and Raw Materials." (Business Summary and data from Yahoo Finance and David Fish's CCC charts) Nucor is a Dividend Champion with 40 years of consecutive dividend increases. The current yield is 3.1% with a 5-yr dividend growth rate of 18.3% and a P/E ratio of 28.3. The projected earnings per share growth rate is 37.37% for next year, but a 5-yr growth rate of -23% reflecting the end of the next business cycle. My usual purchase point is 4% yield or $36.75 with the current dividend. For those that wish to trade, price appreciation might be good this year and next due to high projected earnings growth ($1.64 in 2012, $2.81 in 2013, and $3.86 in 2014).
The long-term cyclicality can be seen from the chart above. I reinvest dividends and build the position during the flat part of the cycle and try to make a strategic purchase just as the stock begins to take off. I have charted the current 5-yr cycle below:
My position purchased in the summer dip of 2011 has appreciated 16.47% per year including dividend reinvestment. However, I have prepared a dividend reinvestment spreadsheet below for the entire period shown in the 5-yr graph above. Some may wonder how the dividend could grow every year while the amount shown by Yahoo Finance appears to drop and then gradually rise. It is due to special dividends paid by Nucor in addition to the regular dividend.
|Stock||Date of reinvest||Div Rate||# Shares||Dividend||Drip price||# Shares pur||Total Value||Current Yield|
The results of this spreadsheet are graphed below:
Although the total value decreased if one had purchased at the peak in 2008, quite a few shares were dripped during the long trough. This is the reason that I hold out for 4% yield to make my strategic purchase.
Conclusion: Nucor is a play on the cyclical global economy. Finding the bottom of the cycle is difficult, but rewarding. I believe the demand in China is about to pick up and there will be a large increase in the price of steel globally. This will provide Nucor with an opportunity to sell large volumes of steel products and earn the rewards of increased earnings during the next 2 years. Although I am retired and depend on stocks like Nucor to supplement my Social Security and Pension, it may be too volatile for others. It is critical that one does their own due diligence on any investment.