Wednesday, December 24, 2014

Nucor Corporation (NUE) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Nucor Corporation (NUE). Below are some highlights from the above linked analysis:

Company Description: Nucor Corporation is the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

NUE is trading at a discount to only 3.) above. The stock is trading at a 51.4% premium to its calculated fair value of $32.63. NUE did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

NUE earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. NUE earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 42 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $57 is below the $500 target I look for in a stock that has increased dividends as long as NUE has. The stock's current yield of 3.02% exceeds the 2.98% estimated 20-year average MMA rate.

Memberships and Peers: NUE is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Commercial Metals Company (CMC) with a 3.0% yield, Steel Dynamics Inc. (STLD) with a 2.1% yield and United States Steel Corp. (X) with a 0.7% yield.

Conclusion: NUE did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks NUE as a 2-Star Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $33.60 before NUE's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 42 years of consecutive dividend increases. At that price the stock would yield 4.4%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.8%. This dividend growth rate is well above the 0.7% used in this analysis, thus providing no margin of safety. NUE has a risk rating of 1.75 which classifies it as a Medium risk stock.

NUE is the largest U.S. steel producer with one of the most modern and efficient operations in the nation. The company has a diverse product mix. The industry should continue to consolidate leading to more stable pricing. NUE is exposed to cyclical markets such as non-residential construction.

Minimills, such as those operated by NUE, are able to quickly adjust production levels to meet demand. Its strategy is to become more vertically integrated with its new Louisiana DRI plant which should eventually provide less volatile production costs. The company expects fourth quarter operating performance for the steel mills segment and downstream products to decline on a sequential basis. The steel mills segment has seen margin compression since the third quarter of 2014 along with lower volumes.

Financially, NUE has a very low ratio of debt to total capital. The stock is trading at a significant premium to my calculated fair value price of $32.63, and its free cash flow payout is 188%. This gives me great concern as to the sustainability of its dividend. As a result, I will not consider a position until its dividend fundamentals improve.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in NUE (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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Tags: NUE, CMC, STLD, X,