Nucor (NUE -1.04%) has achieved an impressive feat, reaching Dividend Aristocrat status. But that doesn't do justice to the streak of dividend increases it has amassed, which currently stands at 49 -- putting the company just one year away from becoming a Dividend King. And with the company expecting 2022 to be a record year, it looks like it has a good shot at getting to 50 years. That's the good news. The bad news is that the cyclical steel industry is already starting to show material signs of weakness.
Ups and downs
One of the most important things investors need to understand about the steel industry is that it is highly cyclical, moving up and down along with the macroeconomic environment. That makes the 49-year streak of dividend increases all the more impressive at Nucor, one of the domestic steel industry's largest and most diversified companies. You don't get to the doorstep of Dividend King status by accident, particularly when your core business cycles between ups and downs, often in dramatic fashion.
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There are a number of pieces to the puzzle here. For starters, Nucor uses electric arc mini-mills, which are more flexible than older blast furnace technology through the steel cycle. While blast furnaces can be incredibly profitable when they are run at high-capacity rates, they tend to bleed red at lower-capacity rates. Mini-mills, simplifying things a bit, can be ramped up and down as needed to better match supply with demand.
In addition, Nucor has created a vertically integrated model. So it has scrap operations, ensuring a key input, and steel fabricating businesses, which use bulk steel to create higher-margin products. Notably, Nucor just recently agreed to buy a company that makes steel structures for the infrastructure sector (like sign poles) and completed the acquisition of a company that makes industrial doors.
When you put it all together, Nucor is a very consistent business. At least for a steel company.
The clouds on the horizon
The bad news is that the steel industry's incredible run of late could be coming to an end. For example, Nucor currently expects 2022 to be a record earnings year based on very strong performance in the first and second quarters. That sounds great until you start to look at the sequential performance in the third quarter.
Notably, Nucor's third-quarter 2022 earnings came in at $6.50 per share. That was down from the second quarter of 2022 when it earned $9.67 per share. It was also notably lower than the $7.28 per share it earned in the third quarter of 2021. It clearly looks like the trend has started to change in a material, and negative, way.
There are a number of issues here. However, one important nuance is that volume declined 8% sequentially from the second quarter and 11% year over year. Steel prices, meanwhile, were up 14% year over year, but fell 2% sequentially. Management expects price weakness to continue into the fourth quarter, leading to "...considerably lower earnings in the fourth quarter of 2022 as compared to the third quarter of 2022..."
In other words, this cycle has probably peaked. And nobody can say that management didn't warn them. Still, given the company's strong history of dividend growth through the steel industry's ups and downs, you probably shouldn't get overly worried.
An opportunity on the horizon
If you are a long-term investor in Nucor there's no reason to jump ship now; the company is working through the cycles of the steel industry just like it always has. In fact, even today, it is probably one of the best options in the space for conservative investors who want exposure to the sector. That said, the best time to buy Nucor has historically been when the steel industry is in the doldrums. In other words, if you don't already own it, now might be a good time to start watching the stock more closely. If management is correct, and earnings start to decline meaningfully, Nucor's share price could start heading south in an equally meaningful way.
