Nucor (NUE 1.72%) has become a greater than $30 billion company after it pioneered a more efficient way of steelmaking in the 1980s and combined it with a unique company culture that made it North America's leader in the sector.
It's been consistently profitable over the decades in a cyclical sector where traditional steelmakers struggled to survive at times. But 2021 was unlike any other year in the company's history. Record net income of $6.83 billion came as the company had already been investing heavily in its future. Nucor stock has risen 118% over the past year, but the following three charts help show why it can still be a successful investment from here.
An operator in a Nucor plant. Image source: Nucor.
Accelerating investments
Steel is a capital-intensive sector, and projects can take years from groundbreaking to full operation. Nucor has had a history of investing throughout business cycles. But it has escalated its growth investments as cash flow ramped up dramatically in the last year. As the chart below shows, the company has announced almost $9 billion in new growth investments since the start of 2017, with several big new projects announced in the past year.
Data source: Nucor. Chart by author.
Since 2017, Nucor has achieved an average return on invested capital of about 15%, according to Morningstar. That includes a depressed 2020 due to the pandemic, and an elevated 2021 due to abnormally high steel prices. If it maintains that average for the foreseeable future, the $9 billion in invested capital could provide nice returns for the company and its shareholders.
Expect more-normalized steel prices
Some of those investments are already paying off, and have helped Nucor achieve its most profitable year in 2021. But the new record for annual net income was almost triple the company's previous record year in 2018. That wasn't just from new investments; it was helped significantly by steel pricing. A supply-and-demand imbalance drove prices up as the economy recovered from 2020's pandemic impacts.
Data source: Wall Street Journal NYSE Steel Index. Chart by author.
Domestic steel pricing more than tripled from the spring of 2020 to the recent peak in mid-2021. Investors shouldn't expect those levels to hold. In fact, prices did begin to retreat in the fall of 2021 as Nucor and other U.S. steelmakers announced plans to add capacity in the coming years.
Recent returns put in perspective
While Nucor shares more than doubled in the last year, the five-year chart puts returns more in perspective. The stock has only doubled in the five years since the company has begun making the above-mentioned growth investments.
NUE data by YCharts.
That equates to an annual return of about 15% and closely matches the level change of the S&P 500 index in that time. But Nucor also pays a reliable dividend that it has increased for 49 straight years. The company will join the list of Dividend Kings if it raises that payout as expected again in 2022. At recent share prices, the dividend yields about 1.7%.
Nucor is in a cyclical industry, and last year might have been a peak in terms of pricing and earnings. But with almost $9 billion invested for new projects in the last five years, the company is setting itself up to raise the range of returns throughout the cycles. Nucor was also recently named the top company in its industry by Fortune magazine. For long-term investors wanting exposure to this basic industry, that means it still should be a solid investment for 2022 and beyond.
