This Dividend Aristocrat Defied the Steel Industry's Smackdown

In recent years, investors have gotten a lot more familiar with the Dividend Aristocrats. With admission to the prestigious list requiring that a company make annually increasing dividend payments for at least a quarter-century, only the strongest companies make the cut. In particular, any company that can't withstand a slowdown in their industry doesn't stand much of a chance of becoming an Aristocrat.

From that context, investors can forgive Nucor (NYSE: NUE  ) for resorting to sustaining its dividend-increase streak largely on a technicality. The steelmaker has found itself in the toughest industry conditions in decades, forcing some of its peers to slash their dividends to preserve cash. Yet Nucor has been able to give shareholders very modest increases, even under huge competitive pressure. Let's take a closer look at Nucor to see whether it's likely to sustain that dividend growth.

Dividend Stats on Nucor

Current Quarterly Dividend Per Share

$0.3675

Current Yield

3.2%

Number of Consecutive Years With Dividend Increases

40 years

Payout Ratio

112%

Last Increase

December 2012

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

Can Nucor survive steel's slowdown?
Nucor has been far from the only steelmaker to suffer from a poor economic environment for the industry. Sluggish economies in Europe and the U.S., combined with big slowdowns for the formerly red-hot growth markets of China, Brazil, and elsewhere in the emerging world, have led to big declines in prices.

In Nucor's most recent quarter, the company saw revenue fall almost 9%, pulling down earnings by nearly a quarter. Like Nucor, rival Steel Dynamics (NASDAQ: STLD  )  uses a locally based mini-mill concept, rather than the more massive centralized facilities that most of their competitors use. Steel Dynamics saw a similar drop in steel prices result in dramatically lower profits as well.

But Nucor is taking steps to become more competitive. By innovating with its direct-reduced-iron production plants in Louisiana, Nucor will employ a combination of scrap metal and new materials, enabling it to use natural-gas-fired heating sources rather than the more costly metallurgical coal that traditional production methods require. Moreover, Nucor's ventures with nat-gas producer Encana (NYSE: ECA  ) should help ensure steady supplies of that fuel well into the future.

The prospects of that business model are so bright that it's likely that competitors will follow suit, with ArcelorMittal (NYSE: MT  ) having great enough direct-reduced-iron capacity to take advantage of low domestic gas prices while they last. Yet for its part, U.S. Steel (NYSE: X  ) has noted that despite considering such a project near an existing Ohio production plant, it is far from certain whether it will move forward with a joint venture to construct a similar facility.

NUE Dividend Chart

Nucor Dividend data by YCharts.

As you can see, some special dividends during the high-growth period of the late 2000s boosted Nucor's total payouts to shareholders for several years. But since 2010, shareholders have had to be satisfied with modest quarter-cent annual increases. Until the industry starts to recover more sharply from the global economic malaise that hangs over steel production currently, investors shouldn't expect anything other than token increases from Nucor.

When will Nucor boost its payout?
With Nucor having raised its dividend in December, it's unlikely that shareholders will see greater payouts before the last month of 2013. At this point, though, it's far more important for Nucor to demonstrate its ability to keep earnings strong enough to provide the cash flow to make distributions without incurring more debt. Doing so will give the company maximum flexibility to take advantage of potentially lucrative strategic combinations, which could enhance its long-term prospects not only to pay greater dividends, but also for share-price appreciation.

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