Nucor (N:NUE) has paid increasing dividends every year since 1973.
The company’s long history of steady growth is an anomaly in the volatile steel industry.
Nucor operates differently from other steel companies. What sets Nucor apart is the way it treats its employees.
The company has not laid an employee off in about 30 years. That fact alone speaks volumes about the company. Nucor rewards its employees based on how productive they are – giving out generous bonuses to productive employees.
It should surprise no one that Nucor is non-union. This is a critical advantage the company has over its competitors.
Nucor’s primary competitive advantage is its employee compensation system. This results in more efficient and productive employees, and a more productive business in general.
Despite the company’s unique employee-based competitive advantage, Nucor has struggled over the last several years.
In 2006, Nucor had earnings-per-share of $5.73. In fiscal 2014, earnings-per-share were just $2.22. The company isn’t expected to break earnings-per-share highs set in 2006 until around 2019 (according to Value Line) – that’s 13 years of no growth.
What happened to Nucor? First, the company’s earnings and revenue fell off a cliff during the Great Recession. Secondly, imported steel is cheaper than domestic steel.
Imported Steel Overview
The amount of steel imported into the United States since 2009 has steadily increased. To be fair, some of this is due to greater demand for steel in the United States.
To a large extent, however, steel imports are rising because international steel tends to be significantly cheaper than domestic steel. The image below shows rising steel imports since 2009.
Source: October 2015 Steel Industry Executive Summary, page 4
The image below shows the top 6 countries from which the United States imports steel through the first 8 months of 2015:
Source: October 2015 Steel Industry Executive Summary, page 3
Together, Canada and Mexico make up 21.1% of steel exported to the United States. These two countries are protected under NAFTA – United States businesses will have to compete with these two countries regardless of any new protectionist policies.
According to the American Iron and Steel Institute:
“The steel industries in China, India, Russia, Brazil, Indonesia and Turkey are either heavily subsidized or owned, at least in part, by the government”
Brazil, China, and Turkey together accounted for 27.7% of imported steel in the first 8 months of fiscal 2015.
China in particular produces large amounts of cheap steel. Here’s how China produces cheap steel according to the Harvard Business Review:
“Many assume that China’s cost advantage in manufacturing comes from cheap labor. But in China’s burgeoning steel industry, our research suggests, massive government energy subsidies, not other factors, keep prices down”
Large subsidies help China (and other countries) to produce cheap steel. United States firms – including Nucor – cannot match the price of this cheap steel.
Does It Matter?
For every industry outside of steel, low steel prices are beneficial for the United States economy. The lower the price of steel, the more construction projects can be undertaken in a wide variety of industries.
Every industry except the steel industry benefits from foreign countries subsidizing steel production. It’s like an indirect transfer of money from foreign governments to the United States.
For the steel industry, low steel prices are very bad. They destroy the domestic steel industry’s ability to compete with foreign products. For Nucor, the amount and price of imported steel matters a great deal.
Protectionist policies in the United States matter to the extent one feels it is important to protect the domestic steel industry from subsidized international competition at the detriment of other industries (like construction and oil and gas).
A Brief History of Steel Protectionism
In 2002, the United States passed significant steel tariffs of 8% to 30%. Before 2002, tariffs were between 0% and 1%.
To put it mildly, this level of protectionism did not go over well with the rest of the world. By December of 2003, the tariffs were lifted due to pressure primarily from Europe and Japan.
Another Round of Protectionism
The recently passed Senate Customs Bill is kicking off a new wave of steel protectionism in the United States. The bill will allow new tariffs for imported steel that is significantly below the market price.
Most of the important steel companies in the United States (including Nucor) have filed a petition to enact tariffs for ‘unfairly’ imported steel from China and other countries.
The Department of Commerce has started an investigation into the ‘unfair’ importing of more than $2 billion in steel from seven countries:
- Australia
- Brazil
- South Korea
- The Netherlands
- Britain
- Japan
- Turkey
It is interesting to note that China is not on the list.
Nucor knows how to play the regulatory capture game. The company has spent over $1 million a year on lobbying each year beginning with 2007. It is likely not a coincidence that lobbying spending increased as soon as the company’s profits began to decline following 2006 highs.
Nucor’s Investment Case
Recent history has proven that Nucor has a difficult time competing in today’s steel environment.
The company has a potential catalyst in the latest round of steel protectionism.
Unfortunately, if history is any guide, this latest round of protectionism will not last. The 2002 wave of tariffs was short-lived due to strong pressure from foreign countries – including many of the United States’ closest allies in Europe and Japan.
Nucor does not have the continuous yearly growth (since 2006) that most Dividend Aristocrats show. The company is much riskier than the average Dividend Aristocrat. As a result, Nucor is not a good fit for the long-term dividend growth investor.
The company does not rank well using The 8 Rules of Dividend Investing due to its volatility and negative growth rate over the last decade.