Nucor (NUE -0.26%) is a very well-run company. This is highlighted by the fact that it has increased its dividend annually for 50 consecutive years. That's even more notable because it operates in the cyclical steel sector, which means business performance is prone to (often dramatic) ups and downs.
With such a strong history of success, it pays to listen when Nucor talks about the steel industry. Right now, management is saying it sees good things on the horizon.
Nucor's management is worth listening to
You don't achieve Dividend King status by accident. Increasing a dividend annually for five decades requires an ability to handle adversity, because every company faces hard times eventually. What's interesting about Nucor is that hard times are pretty much a guarantee because it operates in the highly cyclical steel sector. Indeed, demand for the products it produces is tied heavily to economic activity.
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The fact that Nucor has been able to keep rewarding investors with dividend hikes, even when the company is facing a recession, is a testament to its business resilience and management's commitment to the long term. A key part of the story is that Nucor uses electric arc mini-mills to produce steel. This technology is generally more flexible than older blast furnace technology, so it can react more quickly to industry fluctuations.
But that's not the only thing that differentiates Nucor. The company has long focused on investing in its business so that it can grow through both good times and bad times. Often, management sees industry downturns as an opportunity for capital investment so it can come out the other side a stronger company. Management often talks about trying to achieve higher highs and minimize the lows.
With the stock down more than 20% from its recent highs, investors shouldn't despair. Management is investing and has made very clear where it sees additional demand coming from in the future.
Nucor sees big trends and smaller ones
One of the key shifts that management sees taking shape is an increasing demand for more environmentally friendly steel. To that end, it launched a net zero-emissions steel product in 2021 called Econiq. It continues to look for ways to reduce the emissions profile of the products it produces, including through investment in nuclear power technology. The goal is to help lead the industry as it shifts in a greener direction. Doing so should help Nucor remain an industry giant and provide future growth and investment opportunities.
That push, however, is pretty much par for the course at Nucor. It is always trying to lead. But right now, management is also expressing optimism about increased demand tied specifically to U.S. government spending that will span across the next decade. The numbers are sizable.
For example, the CHIPS and Science Act is expected to lead to an additional 500,000 tons per year of steel demand. That's backed by roughly $55 billion in government funding to help reshore high-tech product production, notably computer chips. Building factories requires a lot of steel, with Nucor expecting around 30 sizable projects over the next decade tied to the CHIPS Act.
In addition to this, the Inflation Reduction Act includes $370 billion of clean energy tax incentives. Most U.S. utilities have sizable clean energy plans at this point, with steel a key component in things like wind turbines. Nucor estimates that government-backed spending will lead to an additional 2 million to 3 million tons of increase in demand each year as companies look to reduce their greenhouse gas emissions.
Then there is the Infrastructure Investment and Jobs Act, which includes $550 billion in funding for things like roads and bridges. These also require huge amounts of steel, which Nucor expects to augment demand by around 3 million to 5 million tons per year. Add all the government-backed spending together, and you get around $975 billion in total spend and between 5 million and 8 million tons of steel demand. That's a pretty big industry tailwind that Nucor is telling investors they shouldn't ignore.
Don't abandon ship when it comes to Nucor stock
While Nucor's business is cyclical, long-term shareholders shouldn't dump the stock just because it's fallen 20% or so. This is a company that has proven it knows how to ride the cyclical ups and downs it has faced time and time again. Notably, today it also sees some big benefits ahead from government-backed investments that will require huge amounts of steel.
Nucor will always be a cyclical company, but the industry backdrop suggests that now is not the time to sell this industry leader as it gets ready to serve what is likely to be a decade-long demand boost for the steel industry.
