Nucorp’s 3.5% Dividend Yield Tempts, and It’s a Rare Standout in Gloomy Global Steel
Glimmers of recovery in the North American steel market have put the spotlight on John Ferriola, a veteran of North Carolina-based steel maker Nucor (NUE), who takes over as CEO on January 1. Ferriola faces a tough job in filling the shoes of CEO Dan DiMicco, an effective manager who announced his retirement in November. But Ferriola has reason for optimism.
Globalization has not been kind to CEOs in the steel industry. For one thing, steel prices have been determined for at least 10 years by the political policies of one government, China, not by free global supply and demand. Recently, thanks in part to Europe’s recession, expansionist European steel makers, ArcelorMittal (MT) and ThyssenKrupp, have posted steep losses, asset write-offs and sales of business units.
“There will be no more big mergers or acquisitions,” Lakshmi Mittal, ArcelorMittal’s CEO, told the Wall Street Journal last month (Dec. 2012). In particular, his dreams of creating a footprint in China, where steelmaking is a major government program, have faded. Heinrich Hiesinger, ThyssenKrupp CEO, is selling steel-making assets, including unprofitable plants in the United States and Brazil, and focusing on more profitable ventures in non-steel businesses, such as shipbuilding.
The Dow Jones Steel Index of steel companies traded in the U.S., which includes ArcelorMittal, Brazil’s Gerdau (GGB) and South Korea’s POSCO (PKX) as well as Nucor, badly trails the rebound in the benchmark S&P 500 index.
A brighter side of steel investing lies in the North American market. Low natural gas prices provide cheaper fuel to run steel plants here. Renewed commercial and residential construction growth promise higher demand for steel. And the new on-shoring trend among U.S. industrial manufacturers, aimed at shrinking supply chains, could also bump up demand for domestic steel. Under DiMicco, Nucor has positioned itself to exploit these trends.
Through November, the tonnage of global steel production in 2012 rose just 0.9%. But North American production through November rose 2.8%, led by a 3.2 percent gain in the United States. China’s output, which accounts for nearly half of total global output, rose 2.9%, while output by the European Union fell 4.8%, South America dropped 3.0%, and Japan fell 0.5%, according to the World Steel Association and industry tracker Steel Market Intelligence.
For investors, Nucor presents a compelling North American alternative to three larger (by stock market capitalization) international steel makers, ArcelorMittal, Gerdau and POSCO. From an operational viewpoint, Nucor’s growth trends in quarterly cash from operations compares well.
Nucor’s dividend yield and steady record of dividend payments since 1973 add to its bullish story.
Ferriola’s task will be to turn DiMicco’s strong performance through the 2008-2009 recession into a bigger share of an expanding North American steel market. In November, the company locked up a 20-year source of energy for its U.S. mills through a supply agreement with energy developer Encana (ECA). Last summer Nucor acquired 100% ownership of New Jersey-based Skyline Steel, a major steel supplier to North American infrastructure contractors. If Ferriola can get Nucorp margins back into high single digits again, today's seemingly high PE ratio won't be such a barrier to investor interest.
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