By Cagdas Ozcan
Nucor (NUE), together with its subsidiaries, is one of the biggest steel manufacturer in the U.S. Nucor's mills are among the most efficient and modern mills in the country. The company has three segments: Steel mills, Raw materials and Steel products. Nucor is one of the best dividend payers in the market. At the moment, the company pays an annual dividend of $1.47 per share, yielding 3.14%. The stock has been a great dividend payer, but its dividend history is a bit erratic.
In order to gauge the dividend stability and trends in the debt metrics, we decided to use our free cash flow model for the company. The results of the model are discussed below.
Free Cash Flows:
Free Cash Flows
Depreciation and other noncash charges
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Source: SEC Filings
In the previous three years, the company has experienced an increase in its net income. Especially in 2011 the net income went up four fold. The same pattern is evident in funds from operations of the company, and the end of 2011 FFO stood at $1,451 million. The cash flow from operations stood at significantly improved levels in 2011 as compared to 2010. Nucor invests a substantial amount in the business, and in the previous three years, the amount of capital expenditures has increased from $345 to $948 million.
The company has been able to generate healthy cash flows in the past. However, as a result of increasing capital expenditures, free cash flows of the firm have come down substantially. Nucor's payout ratio based on free cash flows has gone over 200% over the past twelve months. In 2012, the company paid cash dividends of $541 million, and generated $253 million in free cash flows. Nucor's payout ratio was close to 89% in 2011, but it crossed 200% due to increase in capital expenditures. However, dividends of the company have not been affected by a decline in free cash flows. The capital expenditures will start to bring in more cash flows, which will augment future free cash flows of the company.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow + interest expense/ Interest expense
Debt Service coverage
For my analysis, I have used four ratios. First ratio indicates that the FFO is less than 50% of the total debt of the company, while the ratio has increased over the past three years; it still remains below 50%. Nevertheless, the firm is generating enough cash flows to cover the long term debt. The second metric indicates that one of the most important components of the firm is easily covered with the FFO of the company. We have seen a decline in the ratio; however, it is still above 1, which means the company is able to meet its capital expenditures.
Last two metrics in the table indicate that the firm is able to meet its interest and debt payments sufficiently. Nucor has moderate levels of debt, and the debt levels have declined over the past three years. The company reported long term debt of just over $3 billion at the end of the last year. Nucor's debt is in line with the industry debt levels, and the company has debt to equity ratio of 0.4. The company should be able to meet its interest payments as the ratio shows that the coverage is extremely strong. On the other hand, debt service coverage ratio has fallen sharply due to an increase in short-term debt obligations as well as a decrease in free cash flows.
Our analysis indicates that while free cash flows have fallen due to an increase in capital expenditures; long-term free cash flows generation capacity of the company is intact. Nucor has vast operations and solid market position. The company has energy efficient mini-mills that do not require much labor. As a result, the cost structure of the company is favorable. Furthermore, recent capital expenditures will bring in more cash flows and allow the company to improve its free cash flows. As a result, I believe the payout ratio of the company will come down further, and Nucor will be able to maintain its dividends. There is also a possibility of a dividend increase in near future.