Competitive Advantages & Recession Performance
Nucor operates differently from other steel companies. What sets Nucor apart is the way it treats its employees.
The company has not laid an employee off in about 30 years. That fact alone speaks volumes about the company. Nucor rewards its employees based on how productive they are – giving out generous bonuses to productive employees.
This is a critical advantage the company has over its competitors.
Nucor’s primary competitive advantage is its employee compensation system. This results in more efficient and productive employees, and a more productive business in general.
However, the steel industry is one of the hardest-hit industries when the economy enters recession. The Great Recession hit Nucor very hard, as the company went from strong profitability to a loss.
– 2006 earnings-per-share of $5.73
– 2007 earnings-per-share of $4.98
– 2008 earnings-per-share of $6.01
– 2009 net loss of $0.94 per share
– 2010 earnings-per-share of $0.42
The construction industry is a large driver of steel use. When construction slows (like during recessions), Nucor’s business suffers. It is unlikely the company could survive a protracted depression with its dividend intact.
Valuation & Expected Total Return
From a valuation perspective, Nucor appears overvalued. Nucor stock trades for a price-to-earnings ratio of 20. This is slightly below the valuation of the S&P 500, which trades for a price-to-earnings ratio of 24. However, Nucor’s average price-to-earnings ratio since 2000 is 14.
At a price-to-earnings ratio of 20, Nucor stock may not be priced to buy right now. The company is struggling to grow earnings consistently. As a highly cyclical company, Nucor’s valuation could contract toward its historical average if it does not generate stronger growth.
A significant portion of Nucor’s future returns will be comprised of its dividend. The company takes great pride in its dividend track record, and management understands how important the dividend is to shareholders. Nucor currently distributes $1.50 per share, which comes out to a 3.1% dividend yield. Its dividend yield is significantly higher than the 2% average dividend yield of the S&P 500.
As a result, investors can reasonably expect mid-single digit annualized returns moving forward.
Nucor Corporation (NYSE:NUE) stock offers investors an above-average dividend yield. This gives it some consideration for investors who desire current income. And, Nucor is a Dividend Aristocrat, and is likely to continue increasing its dividend each year.
That being said, Nucor’s dividend increases over the past several years have not kept up with inflation. Over the past five years, Nucor has increased its dividend by 0.6% compounded annually.
The company offers token dividend increases so that it can remain a Dividend Aristocrat, but it should not be considered a true dividend growth stock. As a result, dividend growth investors may want to look elsewhere. The company has higher than average risk, is not recession resistant, and has weak performance over the last decade.
The company does not rank well using The 8 Rules of Dividend Investing due to its high payout ratio and negative growth over the last decade.
Are there scenarios where Nucor delivers tremendous total returns? Absolutely. But that would require legislative change. Nucor is not fully in control of its own destiny.
Note: This article is written by Bob Ciura and was originally published at Sure Dividend.