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Here's Why the Best Is Yet to Come for Nucor

By Reuben Gregg Brewer – Sep 24, 2020 at 8:38AM

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Giant U.S. steel mill Nucor is already an industry leader, but there's still better days ahead if it keeps doing things like this.

Nucor (NUE 1.62%) isn't a household name, despite being the largest steelmaker in the United States. Not surprisingly, it has an incredible history of success behind it -- companies don't usually get to be industry giants by underperforming peers. That said, Nucor still has plenty of good years ahead of it. Here are the reasons why. 

A look at where the company stands today

Nucor lays claim to being North America's largest and most diversified steel company. It has 25 mills, and can produce 27 million tons of steel a year. It uses electric arc mini-mills, which are generally more flexible and cost-effective than older blast furnace technology. It's also the largest recycling company in North America via its David J. Joseph subsidiary, which collects and sells scrap metal. That business actually rounds out the company's vertically integrated business, which covers everything from key steelmaking inputs (scrap metal) to commodity steel products to higher-margin specialty products. 

A steel mill with three men working

Image source: Getty Images

The company's long-term success is probably easiest to see in its dividend, which has been increased for 47 consecutive years. This puts Nucor in the elite group of Dividend Aristocrats. However, the really interesting part of this is that steel is a highly cyclical industry. So being able to weather the highs and lows and still increase its dividend every single year is a testament to Nucor's consistency and financial strength. Indeed, that is a key part of why the best is still yet to come for this industry giant. 

The future looks good

The first reason to expect good things for Nucor is its financial strength and generally conservative business approach. For example, its balance sheet is among the strongest in the domestic steel space, with a debt-to-equity ratio of around 0.5 times and interest coverage of more than seven times. The sound foundation today isn't a one-off, it's a long-term trend -- financially speaking, Nucor is generally one of the best-positioned among its peers. Helping that along is the company's widely diversified business. It is this strong foundation that will allow Nucor to excel in the future. 

That said, there's one more factor that is vital here: Nucor's employees. The company uses a unique profit-sharing model that rewards its workers when times are good but asks them to share in the pain when times are bad. On the one hand, that means Nucor catches a break during the inevitable industry downturns, because salary costs decline. On the other, the profit sharing model is based on employees hitting production milestones, and can lead to above-industry-average wages. So Nucor's employees are highly motivated to hit their targets, and very dedicated to the company. This is a differentiating factor that helps solidify the foundation, and it shouldn't be overlooked.

NUE Dividend Per Share (Annual) Chart

NUE Dividend Per Share (Annual) data by YCharts

One key goal for Nucor, meanwhile, is to always be investing for the future. This is particularly true during industry downturns, as management views such periods as times to improve the company. Indeed, while weaker names are simply looking to survive, Nucor's financial strength and highly motivated team allow it to focus on becoming an even better company. That sentence, in a nutshell, is why the future is bright for Nucor.

Today, Nucor has six major products in the works. In 2020 alone the steelmaker expects capital spending to total $1.7 billion. That's actually relatively high, but building and expanding steel mills is expensive, and Nucor has a lot going on right now. And once these projects are complete, Nucor will have expanded its production capacity, enhanced its product offerings, reached into new geographies, and reduced its cost structure. If the company keeps running with that playbook, it's hard to think it will end up anywhere but at the top of the pack.  

It all comes together

The key takeaway with Nucor is that there really isn't one big thing that suggests it has a bright future -- it's a lot of smaller, fundamental things that the company does right. A strong business model is basically what it boils down to, but, as the above highlights show, it's important to understand what that really means. Nucor stands apart from its peers because it works hard every day to differentiate itself. As long as it keeps that up, the future is almost certain to be better than today.

Reuben Gregg Brewer owns shares of Nucor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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