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Mon. Jul. 5, 2010

Nucor Corporation (NUE) Dividend Stock Analysis *

This article originally appeared on The DIV-Net June 28, 2010.

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 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:

  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 1.) above. The stock is trading at a 56.4% premium to its calculated fair value of $26.72. 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 three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. 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. 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 (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 37 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:

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

NUE earned a Star in this section for its NPV MMA Diff. of the $10,213. This amount is in excess of the $500 target 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 a MMA yielding an estimated 20-year average rate of 4.02%. NUE earned a check for the Key Metric ‘Years to >MMA’ since its 2 years is less than the 5 year target.

Other: NUE is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.

Conclusion: NUE did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks NUE as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $116.14 before NUE’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 1.24%.

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 5.4%. This dividend growth rate is significantly less than the 15.0% used in this analysis, thus providing a large margin of safety. NUE has a risk rating of 1.50 which classifies it as a low risk stock.

Like many industrials, NUE’s earnings and cash flow have declined over the last two years. However, the company is well managed with a solid share in its markets, a very low ratio of total debt to capital percentage and a very diverse product mix. The company’s pay-for-performance and low-cost operations have helped mitigate weak demand in the most recent downturn. The stock is currently trading well above my buy price of $26.72. NUE is a great company, but this is not a great time to buy. 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 (2.68% of my Income Portfolio). See a list of all my income holdings here.

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3 Responses to “Nucor Corporation (NUE) Dividend Stock Analysis *”

  1. dj says:

    Sorry for the late comment on your Nucor analysis. I always read your fair value or buy price comments with great interest because of the hard work and quality you put into your analysis. Most of the time my price ranges tend to be slightly lower than yours. However, with Nucor that’s not the case. I actually have a higher fair value for Nucor, and I have been buying small increments at these current prices.

    In looking at the closing price data over the last five years, I only see about seven days where a price of $26 could have been achieved. Of course that’s not to say it can’t get there in the future. Also looking at your 2009 analysis of Nucor your buy price was closer to $44 which is closer to where I have it pegged. To your credit you’ve been right about ample opportunities to buy lower. I’m just curious about the significant drop in fair value from 2009 to now. I’m not saying it’s not warranted. Is it the outlook for the steel sector in general, Nucor’s declining cash flow and earnings specifically, or something else that contributed to the lower fair value?

    I bring all this up actually not to argue about the fair value of Nucor per se. I’m more interested in what it means for how you manage your dividend portfolio and how you handle what you consider an overvalued stock. Do you wait for buy price to be achieved even if might mean not buying for a long time – possibly years? Also do you try to add to all your positions at certain time intervals, or are you okay with not buying a stock for a long period of time until it gets closer to your fair value estimate? Thanks as always for any insight you can provide and for the all the help you provide your fellow dividend investors.

  2. D4L says:

    dj: NUE’s lower price is a result of its declining fundamentals.

    Best Wishes,
    D4L

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