Nucor Plays It Safe with Cash Returns to Shareholders



A safe play

As noted previously, Nucor Corporation (NUE), the largest steel company in the United States, has announced a share buyback program of up to $900 million. However, in its 2Q15 earnings conference call, Nucor’s CEO noted that “In this time of unprecedented industry turmoil, our focus is not on survival, but on growing the long-term value of our shareholders’ investment.”

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Nucor’s decade of growth

Between 2001 and 2010, Nucor adopted a multi-pronged growth strategy and saw tremendous buildup during this period, when it made over 15 acquisitions. Stock markets also rewarded Nucor for its unprecedented growth. The total shareholder return between September 2000 and December 2012 was 538%, which far exceeded the 134% return for S&P Steel Group Index.

Currently, Nucor makes up 2.73% of the Materials Select Sector SPDR ETF (XLB) and 1.53% of the SPDR S&P Dividend ETF (SDY).

A good utilization of cash?

Of course, Nucor could have directed the funds it used for the acquisition of steel plants toward other investments. But there’s still massive overcapacity in the US steel industry, as the above graph shows. The US steel industry is operating at a capacity utilization rate of just over 70%.

Steel Dynamics (STLD) and AK Steel Holding Corporation (AKS), which completed mega acquisitions last year, are struggling to run their plants at optimum capacity. Even Nucor’s acquisition of Gallatin Steel, which completed last year, has failed to deliver the desired results. Gallatin has only increased Nucor’s exposure to the energy sector, whose fundamentals have taken a nosedive over the last 10 months.

All things considered, then, Nucor might be ridiculed for being too conservative with its excess cash—which means, in the end, that when we look at all the factors combined, a share buyback could be the best path for Nucor.

In the next part, we’ll look at how Nucor’s profit margins stack up to those of its competitors.


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