Nucor Corporation, together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. The company operates through three segments: Steel Mills, Steel Products, and Raw Materials. This dividend champion has managed to increase distributions for 37 years in a row. At the company's latest dividend increase in December 2009, the dividend was increased by 2.90%.
Over the past decade this dividend stock has delivered a 17.60% annual return on average to its shareholders. This is after a 50% drop off its all-time-highs achieved in 2008.
The company reported a loss of $0.94/share for FY 2009, which reflected a 50% drop in revenues and was lower than the $5.98/share reported in FY 2008. For FY 2010 analysts expect Nucor to earn $1.10/share, followed by a steep jump to $3.30/share in FY 2011.
The company’s business model is highly cyclical and thus dependent on the economic situation at the moment. Characteristic of cyclical industries is that P/E ratios are lowest when the economy is at its peak, since earnings per share are highest. On the other hand during recessions the P/E ratio is highest since earnings are depressed. Long term growth in earnings will be driven by expansion through acquisitions, which would result in greater pricing power, as well as industry consolidations and stronger cost controls in relation to materials expense. The US steel industry has been in a consolidation mode over the past decade, which could help companies in mantaining pricing power.
The company has managed to increase its quarterly dividends at a pace of 28.30% per year. Obviously this strong dividend growth reflected the strong earnings growth, fueled by the increasing demand and prices for commodities up until the global financial crisis of 2007-2009. The company paid a special dividend between 2005 and 2008 as well.
The dividend payout ratio follows the volatility in earnings. Currently the payout looks unsustainable based off FY 2010 actual and expected earnings. Based off FY 2011 earnings however it does looks sustainable and also leaves some room for a small increase this year.
The return on equity also seems to follow the erratic pattern in earnings. It was low between 2000 and 2003, after which it stayed above 28% until 2009. Whether the increased economic activity worldwide leads to an increase in return on equity for Nucor remains to be seen.
Currently the company is trading at a forward P/E of 28.70, yields 3.80% and doesn’t seem to have a well covered distribution. However, based on estimates for FY 2011 earnings the company trades at a P/E of 12.10 and has an adequately covered dividend with some room to grow the distribution. The company’s financial position is a little bit more volatile in comparison with other dividend champions, but it should provide decent exposure to basic materials sector for dividend portfolios. I would add to my underweight position in this risky stock on dips.
Full Disclosure: Long NUE
- 8 Dividend Achievers Strike Back
- A dividend portfolio for the long-term
- Dividend Aristocrats List for 2009
- Best Dividends Stocks for the Long Run
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections...
Investors who are looking for quality stocks that regularly raise dividends have several lists available as a starting point in their ...
My investing goals are very simple – to cover my expenses from dividend income generated from my portfolio. In order to translate goals in...
Every dollar that you have in your possession can be traced back to you exchanging your labor for money. The labor you provided was essentia...
I have highlighted below several frequently asked questions about dividend investing. This is not an all inclusive list, but more of a runn...
Motif Investing is an established brokerage which lets investors create their own portfolios, and purchase them for a set commission. Each...
There are four key attributes that need to be considered, in order to be successful at dividend investing. These ingredients include focusin...
Altria Group , Inc.(MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States. T...
There are many misconceptions about dividend investing. I have tried itemizing several of them, outlining them, and providing a brief comm...
I have been writing about dividend growth investing since January 2008. I often get asked questions by readers. Many of those questions in...