Nucor (NYSE:NUE) is the largest steel maker in North America and it recycles scrap steel. The company is non-unionized. Employees participate in a profit-sharing plan. Nucor is in a cyclical industry that has been hurt by subsidized imported steel. Inexpensive natural gas in the U.S. has improved Nucor's competitive advantage. The company has raised its dividend for 43 consecutive years, although recent increases have been small. As a manufacturer of steel, Nucor operates in the materials sector.
F.A.S.T. Graphs ($9.95 per month) is the first stop.
1. The S&P credit rating for NUE is A-, indicated in the lower part of the right sidebar. This credit rating is one notch above my minimum desired rating of BBB+.
2. The price of NUE appears to be undervalued relative to its cash flow. The black line on this graph shows stock price in relation to the cash flow per share (the dark green area). FAST Graphs can be adjusted to show either earnings per share or cash flow per share. When the current price is compared to EPS (not shown here), the price line is in the light green area, which is not as favorable.
3. NUE debt as a percentage of capital is 35%, as indicated just below the credit rating. I prefer debt to be 50% or less, so 35% is an attractive, conservative figure.
4. NUE price/earnings ratio is 17.2. I used the "Normalized Basic Earnings" option for FAST Graphs. One of the nice features about FAST Graphs is that you can use several earnings models. This is how Nucor appears on FAST Graphs using their various metrics:
- Adjusted (Operating) Earnings: P/E is 22.9
- Normalized Basic Tax-Adjusted Earnings: P/E is 11.0
- Normalized Basic Earnings: P/E is 17.2
- Basic Earnings: P/E is 16.1
- Diluted Earnings: P/E is 17.4
- Cash Flow: P/CF is 6.5
5. NUE cash flow per share for 2015 was $5.56. It is estimated to be $4.54 in 2016. The current annual dividend is $1.50 per share, so the dividend is well-covered by cash flow.
BetterInvesting.org ($59 per year) is the next stop.
6. NUE earnings for the four quarters through September, 2015 (shown above) were $1.97. On January 28, 2016 Nucor reported fourth quarter earnings of $.46 (compared with $.66 per share in Q4 2014, above). This would give NUE a trailing four quarters EPS of $1.77. Here is an excerpt from the company news release regarding 2015 earnings:
CHARLOTTE, N.C., Jan. 28, 2016 /PRNewswire/ -- Nucor Corporation announced today fourth quarter of 2015 adjusted consolidated net earnings of $144.7 million, or $0.46 per diluted share. Adjusted fourth quarter of 2015 consolidated net earnings of $0.46 per diluted share was above our quantitative guidance of $0.15-$0.20 per diluted share due to a larger than forecasted LIFO credit and better than forecasted performance in our steel mills segment. This adjusted net earnings excludes a $153.0 million ($0.48 per diluted share) impairment charge related to our Duferdofin Nucor S.r.l. joint venture and an $84.1 million ($0.17 per diluted share) impairment charge on assets which are primarily engineering and equipment related to the current blast furnace project that we concluded in the fourth quarter of 2015 will not be utilized in the future at our St. James Parish, Louisiana site. Including these two impairment charges, Nucor's consolidated net loss for the fourth quarter is $62.0 million, or $0.19 per diluted share. This compares with consolidated net earnings of $227.1 million, or $0.71 per diluted share, for the third quarter of 2015 and consolidated net earnings of $210.4 million, or $0.65 per diluted share, in the fourth quarter of 2014. Nucor reported consolidated net earnings of $357.7 million, or $1.11 per diluted share, for the full year 2015, which compares with consolidated net earnings of $713.9 million, or $2.22 per diluted share, for the full year 2014.
7. The current NUE yield, except for 2011, is near the high end of its range. The high yield in 2011 was 4.9%. The high yield in 2012 was 4.3%. At a January 28, 2016 closing price of $36.64, Nucor's yield was 4.1%.
8. Nucor has 320.8 million common shares outstanding. The current market value of those shares as of January 28 was $11.819 billion. This compares with a market cap of $12.6 billion for Genuine Parts (NYSE:GPC), or $12.9 billion for Parker-Hannifin (NYSE:PH).
9. The 5-year average P/E ratio for NUE was 24.1. This the average of the average high P/E and average low P/E for the past five years. This differs from the average P/E of 39.6 shown above because I have dropped 2010 and added 2015, as calculated here:
The average high P/E for 2011-2015 was 27.9. I arrived at this figure by dropping the outlier year of 2010 and adding the 2015 figure of 28.6. (To get the 2015 high P/E, I divided the 52-week high price of $50.70 by the 2015 earnings figure of $1.77.)
The average low P/E for 2011-2015 was 20.2. I arrived at this figure by dropping 2010 and adding the 2015 figure of 19.2. (To get the 2015 low P/E, I divided the 52-week low price of $33.90 by the 2015 earnings figure of $1.77.)
The current P/E of 20.7 is about 10% below the 5-year average P/E. (I calculated the current P/E by dividing the $36.64 price by the 2015 earnings per share of $1.77.)
10. In the past five years, the NUE payout ratio has ranged from 59.2% in 2011 to 96.4% in 2013. The 2015 dividend was $1.49. This is 84.2% of the 2015 earnings of $1.77.
11. NUE long-term debt as a percentage of capital is 36.0%. This compares with the 35% debt/cap percentage shown on FAST Graphs.
12. The NUE stock price may be in a cyclical low range. The above Company Research sheet from BetterInvesting.org shows the NUE price range from 2010-2014. A glance at the upper right side of the page shows the 52-week price range, which encompasses most of 2015. Of most interest to me is the low prices for each of the past six years (ranging from about $29.80 in 2011 to about $46.40 in 2014). The current price of $36.64 is in the lower part of the price range for the past six years.
My next stop is David Fish's "CCC" Lists.
13. NUE has raised its dividend for 43 consecutive years. This is found in column D of David's spreadsheet. Nucor has maintained this "streak" in spite of the cyclical nature of the steel industry and in spite of intense competition from imported steel, particularly from China.
14. The 5-year dividend growth rate for NUE is 0.7%. This figure is in red on David's spreadsheet because it reflects Nucor's very small dividend increases. Here are the rates of dividend growth, as shown on David's spreadsheet columns AL through AO:
- 1-year: 0.7%
- 3-year: 0.7%
- 5-year: 0.7%
- 10-year: 17.4%.
Many times in recent years, this is where I stop my study and move on to another stock. Nucor may not meet your criteria for a dividend growth stock. The anemic dividend growth of the past five years is troublesome. However, the dividend has increased an average of 17.4% over the past ten years. That number merits further scrutiny. Take a look at columns AQ-BH on David's spreadsheet for the dividend history from 1999-2015:
This table reflects dividend increases in the 12% to 15% range in the early years, increasing to over 27% in 2005, 33% in 2006, 57% in 2007, and peaking at 108% in 2008. Since then, reflecting the current economic cycle, dividend increases slowed dramatically, from 7.6% in 2009, to 0.67% in 2016. The current indicated rate of $1.50 continues the trend of one-cent annual increases since 2011.
It is important for dividend investors to understand Nucor's dividend policy. The small dividend increases since 2010 reflect increases in NUE's base dividend. The large increases in previous years include the base dividend and supplemental dividends that were declared. This is the company's way of maintaining a steady dividend (the base) and enabling shareholders to benefit from the "good years" in this cyclical business. Here is a dividend statement from the company's K-10 report filed on February 26, 2009:
Nucor has increased its base cash dividend every year since it began paying dividends in 1973. In 2008, in addition to increasing the base dividend, the board of directors approved a supplemental dividend in each of the first three quarters based on Nucor's strong performance. Nucor paid dividends of $2.17 per share in 2008 compared with $2.43 per share in 2007. In December 2008, the board of directors increased the base quarterly dividend by 9% to $0.35 per share and suspended the supplemental dividend. The base quarterly dividend has more than tripled since the end of 2007. In February 2009, the board of directors declared Nucor's 144th consecutive quarterly cash dividend of $0.35 per share payable on May 12, 2009 to stockholders of record on March 31, 2009.
15. The Chowder Rule number for NUE is shown as 4.4 on David's spreadsheet (column CD). This number is in red because it is extremely low, reflecting the 0.7% five-year dividend growth rate. Seeking Alpha contributor Chowder requires at least a 12 for an initial purchase.
16. Estimated earnings per share growth for NUE is 10.3%, according to column AE on David's spreadsheet.
This is where I turn to finviz.com.
Finviz confirms the estimated EPS growth for the next five years to be 10.25%. In my "checklist" article about ADM, we had some good conversation about the futility of making five year estimates. With a cyclical stock like Nucor, I find it helpful to think in terms of peak and trough earnings. The strong dividend increases through 2008 (mentioned above) have been severely tempered by the Great Recession and the slow growth of the present economic cycle.
17. The book value per share for NUE is $24.03. The price/book value ratio is 1.52.
18. The Nucor website provides helpful information about the company, including this summary statement:
Nucor and affiliates are manufacturers of steel products, with operating facilities primarily in the U.S. and Canada. Products produced include: carbon and alloy steel -- in bars, beams, sheet and plate; steel piling; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; steel grating; and wire and wire mesh. Nucor, through The David J. Joseph Company, also brokers ferrous and nonferrous metals, pig iron and HBI/DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap. Nucor is North America's largest recycler.
Here's a snapshot of the company's various divisions:
- Nucor Corporation and division Laurel Steel operate bar and cold finish mills and manufacture welded wire mesh and cold-drawn wire, as well as beams, joists and plates.
- Harris Steel makes grating products through Fisher & Ludlow, makes rebar through Harris Rebar and distributes rebar and remesh through Harris Supply Solutions.
- David J. Joseph Company recycles scrap metal through a brokerage team, over 60 recycling facilities and a fleet of railcars.
- Skyline Steel produces steel sheet piling, pipe, wall systems, geostrucrtural solutions, connectors and structural sections used in ports, piers and harbors, underground parking garages, water and sewer lines, bridges, storm protection, tie rods, etc.
19. A transcript of the Q4 2015 earnings conference call is available through Seeking Alpha.
20. You can listen to a webcast replay of the Q4 2015 earnings conference call that was held on Thursday, January 28.
From either the audio webcast or the transcript of the January 28, 2016 conference call, CEO John Ferriola provided a helpful response to a question from Bank of America Merrill Lynch analyst Timna Tanners about the company's intended use of cash:
We always have three approaches to our capital allocation... the first one is to invest in the profitable growth of our company. .... there are many opportunities to continue to invest in the profitable sustainable growth of our company both internally, organic and externally through M&A activity. ... That will always be our first objective.
The second objective in capital allocation is to make sure we return our shareholders valuable capital to them in an appropriate way. We look at the dividend as being a very appropriate way to do that. We think it's a good dividend, a well-balanced dividend. We look to maintain a prudent payout ratio between the supplemental (dividend) and our base (dividend) and we look forward to the days like we had in 2005 and 2006 when we have such good cash flow coming in that we can increase the supplemental dividend and return more of the capital to our shareholders....
And our third objective ... when we can't beat either of the (first) two is to look at stock as a potential buyback. ... there's a lot of questions about the cash and our cash position today ... we generated a lot of cash in 2015 ... the second highest that we've had … since 2008 ... we have a lot of cash on hand ....
If we don't see opportunities out there that return the kind of capital, return on invested capital that we're looking for, then we'll do the prudent thing and return it to our shareholders or buy stock. We saw during the past month stock a good opportunity and we bought some stock.
Several recent Seeking Alpha articles have highlighted Nucor, including WYCO Researcher's January 27 article that focused on their recycling of scrap steel, Nucor Is A Politically Correct Green Investment; and Simply Safe Dividends' January 25 article, Nucor Is A Dividend Aristocrat Offering A 4.2% Yield.
I have been interested in Nucor since the mid-1980s, when I heard a company presentation at an investor's fair.
I owned shares of Nucor once before, beginning in November, 2011, with an initial purchase at $38.25. The yield at that time was 3.79%. I held NUE until October 31, 2012, closing the position at $40.58. My memory of that sale is vague, but on the same day I bought shares of WP Carey (NYSE:WPC), NuStar Energy (NYSE:NS), and Roundy's (NYSE:RNDY). WPC at $48.90 was a good investment. As for NS and RNDY, let's just say that was before I began to focus on a company's credit rating.
On January 27, Nucor traded in a range of $35.57 to $36.63. For the previous two weeks, it traded in a range of $33.90 (the 52-week low) to $36.85. I placed a limit order to make an initial purchase at $35.10. The order filled the next day, January 28. The price range for that day was $34.90 to $37.00. At the purchase price of $35.10, with an annual dividend of $1.50, the yield was 4.27%.
This initial position in Nucor comprises 1.3% of the market value of my retirement income portfolio and it will contribute 1.2% of the portfolio's income.
I made this purchase in spite of Nucor's low dividend growth rate since 2010, and in spite of its low Chowder Rule number. Here are the positives that motivated my purchase:
- Valuation: The company appears to be attractively priced, with a yield at 4.27% at the time of purchase.
- Quality: The S&P credit rating is A-.
- Low Debt: Debt is about 36% of capitalization.
- Essential Industry: NUE is the largest steel producer in North America.
- Management: The company has made sound acquisitions, built excellent plants near natural gas sources, incentivized workers through profit-sharing, and grown dividends (albeit slowly since 2009) for 43 consecutive years.
- Key Takeaway: What I learned from this study that I had previously overlooked is revealed in point 14 of the above checklist. I'm willing to look past the most recent five lean years to remember the excellent dividend growth Nucor provided from 1999-2008. I believe the most recent years have been a time for the company to stabilize and expand, providing a strong basis for potential growth in earnings and dividends. And, until that growth occurs, the current price provides a good yield while we wait, reinforced by the company's long commitment to raising the dividend.
This article is part of the journal of my effort to design a retirement income portfolio. It is not intended as a recommendation to buy or sell any security. I offer this as part of Seeking Alpha's ongoing community conversation about stocks to study and how to design a portfolio. Please do your own due diligence.
Disclosure: I am/we are long NUE, JNJ, PG, MMM, MRK, CMI, MSFT, WMT, GPC, IBM, CMP, PEP, WEC, SO, EMR, HCP, PH, UNP, T, EPD, O, DOV, ADM, TXN, NNN, WPC, MAIN, STAG, HASI, EVA, PEGI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.