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Nucor and ArcelorMittal: How Capital Allocation Strategies Differ

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Aug. 10 2017, Updated 9:05 a.m. ET

Capital allocation

Over the last couple of years, most steel companies had a single answer for capital allocation, which was to make efforts to strengthen their balance sheets. Other avenues such as returning cash to shareholders and expansion weren’t very high on steel companies’ agendas. However, Nucor (NUE) and Steel Dynamics were two notable exceptions. While several other steel companies raised cash by selling equities last year, Nucor and Steel Dynamics had a share repurchase program in place. With steel markets now stabilizing, steel companies (X) (CLF) could be taking a fresh look at their capital allocation strategies.

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Growth

We’ve already seen steel companies chasing growth—both organic and inorganic. Companies such as AK Steel (AKS) have announced acquisitions to capitalize on the expected uptick in the steel industry. Let’s see what the steel companies had to say about capital allocation during their 2Q17 calls.

2Q17 calls

According to Lakshmi Mittal, ArcelorMittal’s (MT) CEO (chief executive officer), “While further de-leveraging remains a priority, we are also capitalizing on growth opportunities. This includes our investments to support our continuous shift towards high added value products as well as the recently announced acquisition of Ilva in Italy.” While ArcelorMittal’s leverage ratios have improved significantly over the last year, the company could still look at lowering its debt levels.

According to Nucor’s CFO (chief financial officer) Jim Frias, “Our first priority is to invest for profitable long-term growth.” He added, “Our second priority is to return cash to our shareholders primarily with cash dividends consistent with our success in delivering long-term earnings growth.”

During the company’s 1Q17 call, Frias said that Nucor would decide by the end of the year about how to return cash to shareholders. However, the final decision would be based on how steel market conditions shape up in the coming months.

In the next and final part of this series, we’ll look at steel companies’ valuation multiples.

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