Nucor Corporation (NYSE:NUE) has increased its dividend for 43 consecutive years – every year since it first began paying dividends in 1973. For a company operating in the often-challenging steel market, such consistency is remarkable.
The stock also offers the fifth highest dividend yield (4.3%) out of all the dividend aristocrats, perhaps making it an interesting candidate for investors living off dividends in retirement to consider.
While the stock is not in our Top 20 Dividend Stocks portfolio today, the company possesses several competitive advantages that dividend growth investors should be aware of.
Among the funds tracked by Insider Monkey, NUE is not a very popular stock with just 25 funds holding around $246.45 million worth of stock as of the end of September, 2015. However, during the third quarter of the last year, the number of funds with long positions went up by three and the aggregate value of holdings went up from $223.77 million and represented over 2% of the company at the end of September. John Overdeck and David Siegel’s Two Sigma Advisors and Steve Cohen’s Point72 Asset Management were the two largest shareholders of NUE in the Insider Monkey database, having reported 1.33 million shares and 1.07 million shares, respectively, in their last 13F filings.
NUE manufactures steel products in the U.S. and Canada and began operating its first mini mill in the late 1960s. With production capacity that exceeds 27 million tons, NUE is the largest manufacturer of steel products in North America.
Some of the main products NUE produces are carbon and alloy steel (used in bars, beams, sheets, and plates); steel piling; steel joists; steel deck; concrete reinforcing steel; cold finished steel; and steel fasteners. Steel is sold into a variety of end markets, but non-residential construction and automotive markets are the biggest drivers for NUE.
2014 sales by product type: sheet (32%), bar (22%), raw materials (15%), downstream products (11%), structural (10%), plate (10%).
NUE is in a tough business. The price of steel is extremely volatile, demand trends are unpredictable, raw material costs can significantly fluctuate, and many overseas competitors are happy to irrationally flood the market with supply.
So, how has NUE not only survived these challenges but also managed to raise its dividend with such consistency over the last 40+ years?
In a commodity business such as steel, it’s all about cost. NUE runs an extremely lean business model that has made it one of the lowest-cost producers in the world.
Steel is generally manufactured in one of two ways. Traditional steel mills rely on iron ore, blast furnaces, and unionized labor. Mini mills such as NUE take a different approach, using recycled metal, steel scrap, and electricity to manufacture steel. These raw materials are usually cheaper than iron ore and require less labor and capital in their manufacturing process. Scrap prices also tend to move with steel prices, providing a bit of a hedge throughout the steel cycle (e.g. if demand for steel falls, NUE’s primary input cost will also likely fall in price, helping protect gross profit to an extent).
As a result, mini mills have more variable cost structures and production schedules that can be quickly adjusted up or down in response to market conditions. NUE also has a nonunion workforce that receives over 60% of its pay in the form of incentive bonuses, which protect the company’s profits during periods of depressed demand.
While the majority of steel manufacturers in the U.S. have transitioned to mini mills, one of the biggest players still uses blast furnaces – U.S. Steel. However, the company is now transitioning to use more mini mills, recognizing their relative effectiveness and superior profitability.
As seen below, U.S. Steel (X) burned through substantial cash during the financial crisis and was forced to cut its dividend.
Source: U.S. Steel, Simply Safe Dividends