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Nucor’s Share Buyback Program—Benefit or Detriment?

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Sep. 16 2015, Updated 7:07 p.m. ET

Nucor’s share buyback program

On September 2, 2015, Nucor Corporation (NUE), the largest steel company in the United States, announced a share buyback program of up to $900 million. According to Nucor, “Share repurchases will be made from time to time in the open market at prevailing market prices, through private transactions or block trades.”

Share buybacks are not something new for Nucor. Buybacks are part of Nucor’s strategy to return capital to shareholders. But at this juncture, is a share buyback the correct thing for Nucor? Let’s explore.

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Money well spent?

Nucor is among the rare steel companies that have the financial resources to announce a share buyback. Its peers are struggling to manage their debt—let alone a share buyback. However, you may argue that the money could have been better spent on making strategic acquisitions.

Iron ore assets

Nucor has a history of investing during downturns—it invested almost $6 billion, for example, between 2009 and 2014. In the past, Nucor has hinted at acquiring iron ore mining (XME) assets. However, the long-term outlook for iron ore prices looks bleak when you consider the slowdown in China.

As the above chart shows, iron ore prices have been under severe pressure over the last couple of years. Earnings of iron ore miners like Rio Tinto (RIO) and BHP Billiton (BHP) have been negatively impacted by falling iron ore prices.

Other steel companies have begun to hold back on mining operations. AK Steel Holding Corporation (AKS) even wrote off all investments in its iron ore joint venture, and ArcelorMittal SA’s (MT) Mining segment has generated operating losses for three consecutive quarters now. It’s thus tough for a company like Nucor to justify any acquisition in the mining space at this juncture.

In this sense, the share buyback program that Nucor has announced could also mean that the company has adopted a conservative view.

But is this move the right direction for its investors? We’ll explore this question further in the next part of this series.

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