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Better Steel Stock: Nucor or Steel Dynamics

By Reuben Gregg Brewer – Nov 24, 2021 at 9:18AM

Key Points

  • Nucor and Steel Dynamics share some important and desirable qualities.
  • Nucor is the industry giant, and is likely to be a slow and steady grower over time.
  • Steel Dynamics is a smaller upstart steel mill, but has been growing faster.

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There are a lot of similarities between Nucor and Steel Dynamics, but which one is right for your portfolio?

With the expectation of increased infrastructure spending, investors have bid up the prices of leading steelmakers like Nucor (NUE -0.52%) and Steel Dynamics (STLD 0.67%). If you are looking at the steel sector as well, which of these two mills is the better investment option?

The answer is that it depends. There are a lot of similarities, but one big difference that could determine which one you like more.

Built from the same mold

Nucor has been making steel for decades, building up a streak of 48 consecutive annual dividend increases. It's a Dividend Achiever at this point that's getting very close to becoming an even more elite Dividend King. That's hard to match -- and the company has achieved this despite the highly cyclical nature of the steel sector, which tends to wax and wane along with the broader economy.

A street sign that reads where to invest.

Image source: Getty Images.

But here's the thing: Steel Dynamics, which had its initial public offering in 1996, has increased its dividend annually for 11 consecutive years. That's not as impressive, but it is pretty clear that the company has gotten on the dividend growth bandwagon and that it has some strengths that allow it to do well even in down cycles. 

What's notable here is that Steel Dynamics was founded by a former Nucor employee. The 12 years that Steel Dynamics CEO Mark Millett spent at Nucor clearly had an impact. And that goes beyond the dividend. For example, both companies use electric arc mini-mills, which, to simplify things, tend to be more flexible than older blast furnace technology. That allows Nucor and Steel Dynamics to adjust to industry conditions more quickly, and it helps them to maintain relatively strong profit margins even when the steel sector is in a downturn. 

That's why these two steel mills are probably better options than United States Steel (X 2.03%) or Cleveland Cliffs (CLF 0.20%) at this point. These two companies, which make heavy use of blast furnaces, have to operate their mills at high rates to make a profit. That can lead to outsize profitability in good markets, but when the cycle turns lower -- which it inevitably does every time -- they can quickly fall into the red. For long-term investors, then, more consistent Nucor and Steel Dynamics are the way to go.

The big difference

That brings up the most important difference between these two steel mills: size. Nucor is the largest and most diversified steelmaker in North America. It has 25 steel mills producing a broad range of products, including top-ranked positions in the structural steel, merchant bar steel, cold finish bar steel, joist and deck steel, piling distribution, metal buildings, steel electrical conduit pipe, and insulated metal panels markets. And it has No. 2 positions in rebar, steel and fab plate steel, SBQ bar steel, and hollow structural section steel tubing areas. The company's market cap is roughly $33.5 billion. Although Nucor has a long history of capital spending to ensure it continues to grow, it takes a lot to move the needle here at this point. The company has two projects that it expects to complete in late 2021 worth $975 million, and another project, a new mill, slated for 2025 worth $2.7 billion.

NUE Gross Profit Margin Chart

NUE Gross Profit Margin data by YCharts

Nucor is more of a slow and steady giant, looking to produce higher highs and higher lows on the income statement. Growth is important, but it's the general uptrend that's more important. Notably, the dividend has only been increased in the low single-digit percentages over the past decade. By contrast, Steel Dynamics dividend was increased by an annualized 11% over the past decade. 

A big part of that has to do with the fact that Steel Dynamics is a smaller and faster-growing company. For starters, its $13 billion market cap puts it at less than half the size of Nucor. But you have to take that a step further: As an upstart steel mill, it's easier to grow the business because smaller investments have a bigger impact. It has eight mills, with another on the drawing board. Capital spending plans include a $2 billion investment slated to open in late 2021 that will ramp up production over the following two years, and a $500 million expansion project slated for 2023. However, because of Steel Dynamics' relatively small size, these investments are likely to have a material impact on its financial results and push the company's growth faster than what Nucor will see from the larger investment plans that it is currently working on. That's not good or bad, per se, it's just that they are in different stages of their life cycles. And, for growth-minded investors, Steel Dynamics would likely be a better option than Nucor.

The one that's right for you

So which one is the better option? The answer is that it depends on you as an investor. More conservative types will probably prefer industry bellwether Nucor and its slow and steady growth profile. It won't excite you, but it is likely to remain an industry leader for a very long time. Boring can be very profitable for investors.

Steel Dynamics, on the other hand, is still a relatively small competitor when compared to Nucor. However, that has led to faster growth, despite the other similarities they share, and will probably continue to lead to faster growth for many years. If that sounds more like what you are after, then go with Steel Dynamics.

Rest assured, however, that they are both well-run companies that have proven they know how to execute in industry upturns and the inevitable downturns that follow.

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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