If you've never seen a steelmaking operation in person, it's a loud, hot, bright, exciting process. That excitement might not translate into owning a steel stock, but maybe it should. Take the stock of North America's largest steelmaker, Nucor (NUE -0.26%), for example.
The steelmaking process alone isn't the only thing that should be exciting for investors. Believe it or not, returns from this boring steel stock have clobbered those from technology juggernaut Amazon over the past three- and five-year periods. That's why investors looking to beat the market should look into this underappreciated stock.
Eye-popping results
The return from Nucor stock alone has trounced Amazon over the last five years, and the total return including dividends has tripled that of Amazon. That equates to annual returns of more than 25% for Nucor shareholders.
NUE Total Return Price data by YCharts
That performance didn't come because Nucor is some small start-up breaking out or because it pioneered a breakthrough technology in recent years. It did, in fact, do that in the 1980s when it introduced the electric arc furnace as a high-volume steelmaking technology.
That more efficient and nimble process was never expected to be able to achieve quality levels equal to that of integrated mills using blast furnaces. But Nucor has succeeded by continuing to innovate over the decades with processes and a business model that many other steelmakers have worked to duplicate.
Yet investors still don't reward Nucor with a valuation worthy of its results. It recently traded at a price-to-earnings ratio of about 8.5 -- or less than half that of the historical average of the S&P 500 index. A discount to the market isn't unusual for Nucor as it is in a cyclical industry. But this is at a time as Nucor's massive growth investments will begin to pay off in coming months and years. So while investors should expect cyclicality in Nucor's stock price, it can grow over the longer term as it has more assets contributing to its bottom line.
Compounding returns
Nucor's approach to wealth creation is similar to what individuals should seek to accomplish with personal finances. Reinvesting profits, or gains, creates a compounding effect that has driven Nucor's admirable returns. While the steel business takes a large amount of capital even just to maintain and upgrade existing assets, Nucor has been investing a large amount of money for growth, too. Since 2017, the company has poured nearly $14 billion into growth investments and acquisitions.
Nucor's growth investments will be adding to the bottom line for years to come.
Those investments have included several projects to expand its coated sheet steel capacity and capabilities, a state-of-the-art $1.7 billion plate mill in Kentucky that began operations this year, and a fully modern, advanced sheet mill in West Virginia currently under construction. Nucor has also made several acquisitions to build its downstream operations and support its steelmaking operations.
The company has also built and begun production on two structural reinforcing bar (rebar) micro mills in Florida and Missouri. Another of these novel concept mills is under construction in North Carolina. The next growth investment will likely be for another rebar micro mill to be located somewhere in the Pacific Northwest. The company has already stated it is reviewing potential locations there.
Those investments, along with spending to maintain existing operations and support loyal teammates, have delivered solid returns for shareholders.
An enviable financial position
Even with all the capital allocation for growth, Nucor still promises to return about 40% of its profits to shareholders. It has raised its dividend for 50 straight years, making it one of the S&P 500 Dividend Kings. Nucor has also repurchased nearly 20% of its outstanding shares in the past five years. That gives share owners a meaningfully bigger piece of the profit pie.
The nearly $14 billion in growth investments shown above compares to about $24 billion the company has reported in net earnings from 2017 through the first nine months of 2023. Going forward, investors can still expect the company to continue its practice of returning about 40% of its profits back to shareholders in the form of buybacks and dividends. That should come even as it maintains enough cash flow to continue to grow.
Nucor already has an enviable balance sheet, too. It held $6.73 billion in cash and cash equivalents as of the end of the third quarter. That's more than enough to cover its current long-term debt held at attractive interest rates.
In the near future, though, the significant investments already allocated will continue to increase contributions as they start up and ramp up production. Sometimes in investing boring is good, and Nucor is one boring stock that could continue to bring in surprising returns going forward.
