The world needs steel. It's a vital input into everything from cars to buildings. But all steel companies are not made the same. U.S. steel giant Nucor (NYSE:NUE) has positioned itself at the head of the industry, and might just be one of the best steelmakers on Earth. But is it a buy?

Doing things the Nucor way

The core of Nucor's business is its collection of 25 electric arc mini-mills. These facilities are smaller and more nimble than older blast furnace technology used to make primary steel. Not only do they make heavy use of recycled scrap metal, but they are, to simplify things greatly, easier to ramp up and down with demand.

Blast furnaces can be highly profitable when running full bore, but they quickly turn unprofitable when demand cools off and they are run below optimum levels. And they require material amounts of iron ore and coal, which aren't quite as environmentally friendly as the scrap and electricity at the core of electric arc mills. 

A steel worker in a foundry with molten steel pouring from a vessel.

Image source: Getty Images.

However, Nucor is hardly the only company using this technology. Even industry legend United States Steel is focusing more on these types of mills with the recent purchase of an upstart electric arc mill.

That's where some additional advantages come into play with Nucor. Its smaller mills have allowed it to position its production in key markets, which affords cost advantages on the transportation side of things. Steel is heavy and costly to move around, so this is pretty notable. In fact, some of its most recent mill investments have been specifically made to enhance logistical advantages. 

Nucor also has one of the most diversified product lines in the industry. But just producing a specific type of steel isn't enough -- the company works to be a leader in all of the markets it serves. It's done a pretty good job of it, holding the number-one or -two spot in 11 different product areas. 

It also has a unique pay structure that makes heavy use of profit sharing. Essentially, employees are rewarded when times are good, earning above-industry wages, and have to share in the hit when times are tough. That helps to reduce Nucor's costs right when it needs some extra financial flexibility, which is yet another operational advantage over peers. So it is big, diversified, flexible, and has notable cost advantages over peers.

To buy or not to buy?

All of that suggests that Nucor is a great company. But great companies aren't always great investments, a particularly important issue to consider today in the face of coronavirus upheavals.

One of the first things investors need to consider right now is financial strength, which is yet another area where Nucor has historically differentiated itself. Specifically, the company's financial debt to equity ratio of roughly 0.4 times is at the low end of its domestic peer group. It covered its trailing interest costs by 6.6 times, as well, which is a robust number and near the top of its competitive set. So it is highly likely that Nucor can muddle through just about any situation thrown at it. That strength is highlighted by the company's 47-year streak of annual dividend increases, which easily makes it a Dividend Aristocrat

NUE Financial Debt to Equity (Quarterly) Chart

NUE Financial Debt to Equity (Quarterly) data by YCharts

The problem right now is valuation. Although there are multiple ways to examine this, using dividend yield is probably the quickest and easiest. Over the past decade or so, Nucor's dividend yield has peaked at over 4% on four separate occasions. It was pretty attractive during those moments, one of which came in the early 2020 bear market, when the yield rose to around 5%. Over the same 10-year span, the yield has hit lows in the 2.5%-to-3% range at times when investors were perhaps too exuberant about the future. After a rapid price recovery from the early-year bear market, Nucor's yield is around 2.8% today, suggesting the price is fairly high right now. 

The key takeaway

Don't just write Nucor off because the stock looks expensive right now. Steel is a cyclical industry, and eventually, a downturn will lead to price declines that put the stock back on sale. With an industry-leading and differentiated business model, and a strong balance sheet, Nucor is worth keeping on your wish list for those rare times when Mr. Market is in an overly pessimistic mood. That's not the case today, but if you pay attention you should eventually have an opportunity to add this high-quality dividend payer to your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.