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Did US Steel Companies Go Overboard with Buybacks?

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Dec. 11 2018, Updated 2:20 p.m. ET

US steel companies

As we noted previously, U.S. Steel Corporation (X) announced a $300 million share buyback program during its third-quarter earnings release. Other steel and iron ore names including Cleveland-Cliffs (CLF), Nucor (NUE), and Steel Dynamics (STLD) have also announced buybacks in 2018. AK Steel (AKS) has been a notable exception. The company doesn’t really have the financial flexibility to consider a buyback, especially after the Precision Partners acquisition.

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The buybacks haven’t helped lift steel stocks, which is visible in their dismal price action. Steel company executives might have been under pressure to lift their stock prices. The stock prices have sagged despite strong cash flows. Buybacks are the preferred tool to return cash to shareholders, especially when the boost is more of a windfall than a sustainable rise in earnings.

Valuation

While buybacks would help support steel companies’ valuation from a PE ratio perspective, U.S. Steel Corporation might have been better off repaying some of its debt instead of announcing a buyback. Steel Dynamics and Nucor have benign financial leverage ratios. An electric arc furnace that U.S. Steel Corporation previously announced at Fairfield was delayed amid poor market conditions, which might have been another judicious use of the Section 232 windfall.

Nucor has been pretty dynamic with its capital allocation in 2018. We’ll discuss Nucor’s capital allocation in the next part.

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