Dividend investing is a tried-and-true strategy for generating strong, steady returns in both good and bad economies. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Nucor
1. Yield
First and foremost, dividend investors like a large yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Nucor yields 3.6% -- moderate and worthy of further investigation.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.
Nucor’s payout ratio is a whopping 184%. On a free cash flow basis, however, things look a bit better at 85%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Let's examine how Nucor stacks up next to its peers:
|
Company |
Debt-to-Equity Ratio |
Interest Coverage |
|---|---|---|
|
Nucor |
58% |
4 times |
|
Steel Dynamics |
107% |
3 times |
|
AK Steel |
116% |
N/A* |
|
US Steel |
96% |
N/A* |
Source: Capital IQ, a division of Standard & Poor's. * Negative operating earnings.
Nucor’s debt-to-equity ratio is a bit lower than its peers’. Earnings are obviously depressed across the industry, as indicated by low interest coverage.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Nucor hasn’t been immune to the economic downturn. Earnings per share have fallen at a rate of 28% of the past five years, while its dividend rose 35%.
The Foolish bottom line
Nucor may be able to support its dividend for the time being, but given its high payout ratios, an earnings and free cash flow rebound would be important for long-term dividend stability.
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