This article originally appeared on The DIV-Net June 1, 2009.
Linked here is a detailed quantitative analysis of Nucor Corp. (NUE). Below are some highlights from the above linked analysis:
Company Description: Nucor Corporation is engaged in the manufacture and sale of steel and steel products. As 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: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
NUE is trading at a discount to 1.) and 2.) above. If I exclude the high and low valuations and average the remaining two, NUE is trading at a 8.9% discount. NUE earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
NUE earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. NUE has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 36 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)? 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:
- NPV MMA Diff.
- Years to > MMA
NUE earned both of the available Stars in this section. The NPV MMA Diff. of the $28,974 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as NUE has. If NUE grows its dividend at 15.0% per year, it will take 2 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.64%. NUE earned a Star since its Years to >MMA of 2 is less than 5 years.
Other: NUE is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Although NUE is exposed to cyclical end-markets, the company has a diverse product mix and a solid share of the markets in which it competes. Also, NUE has a low total debt to assets ratio and generates substantial free cash flow. With the global steel industry consolidating via mergers, the increased concentration of production among fewer companies should result in greater pricing discipline. This should help NUE to continue generating strong free cash flow.
Conclusion: NUE earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of six Stars. Since my scale tops out at five, this quantitatively ranks NUE as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $91.41 before NUE’s NPV MMA Differential fell to the $3,000 that I like to see for a stock with 36 consecutive years of dividend increases. At that price the stock would yield 1.53%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 6.0%. This dividend growth rate is well below the below the 15.0% used in this analysis, thus providing a significant margin of safety. NUE has a risk rating of 1.50 which classifies it as a low risk stock.
It is important to remember the above analysis is based on quantitative historical data and assumes the future will be similar to the past. NUE has some tough days ahead as steel prices and demand continue to decline. However, NUE is a well-run company and with its strong balance sheet is in a excellent position to ride out this recession. Although I am looking to increase my position in NUE and the stock is trading below my buy price of $43.91, I believe there will be ample opportunities in the future to buy below its current price. For additional information, including the stock’s dividend history, please refer to its data page.
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 was long in NUE (1.2% of my Income Portfolio).
What are your thoughts on NUE?