It is hard to find good dividend stocks that operate in cyclical industries. That doesn't mean it can't be done, however. ExxonMobil is a great example from the highly volatile energy sector. Dividend King Nucor (NUE -1.15%) is an even better example, hailing from the steel industry.
If you are looking for a reliable dividend stock today, Dividend King Nucor's roughly 40% pullback from its highs is a potential opportunity.
What does Nucor do?
At its core, Nucor is a steel maker. That said, it has always used electric arc mini-mills, which are more flexible than the older blast furnace steel-making process used by many of its competitors. Mini-mills also make extensive use of scrap metal instead of iron ore and metallurgical coal, so they are more desirable from an environmental perspective, too. Electric arc mini-mills tend to have higher margins throughout the full steel cycle while blast furnaces tend to generate huge profits during peak periods and bleed red ink (often badly) when the steel industry is in a funk. So Nucor has, historically, remained largely profitable in both good steel markets and bad ones.
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There are some other factors that help on the profit front. For starters, Nucor has long focused on having a broad product portfolio. It has also worked hard to expand its geographic reach. Both of these diversification efforts help to soften the peaks and valleys in the cyclical steel industry. But there's more going on here because Nucor has also worked to expand its specialty steel products offerings.
Essentially, Nucor uses a portion of the bulk steel it produces internally to make things like industrial garage doors and the racks used in data centers. Demand for specialty products like these tends to work on a different cycle than the broader steel sector and they have higher margins. Those two facts help support the long-term profitability of the overall company, as well. Those two examples, meanwhile, were specifically chosen because they are two of the most recent additions to the mix, showing how the company adjusts and changes over time.
The real kicker, however, is that Nucor's management team doesn't see industry downturns as headwinds so much as opportunities. Although the company is always making capital investments to support the business, it often ramps up its efforts during downturns so it comes out of the weak patch as a stronger company. The logic makes solid sense, since a steel market downturn is likely to provide the best price points for building assets and for acquisitions.
Nucor's proof is in its dividend pudding
This is a playbook that Nucor has successfully run for decades. The proof of that is its status as a Dividend King, with more than 50 consecutive annual dividend increases under its belt. A company simply can't build a dividend record like that without a strong and successful business. That's why so few companies make it into the elite Dividend King grouping. That Nucor has achieved this despite operating in a cyclical industry is a double testament to the company's operating ethos and dedication to investors.
That said, Nucor can't avoid the fact that it operates in a cyclical industry. Which is actually an opportunity for investors that think in decades and not days. As the chart below highlights, Nucor's stock has experienced major pullbacks around the size of the current 40% or so decline multiple times over the decades. So the current drawdown isn't really that shocking if you understand the nature of the steel industry.
Each of those historical sell-offs, however, has been a good time to buy Nucor. That's highlighted by the chart below, which shows that the stock has moved steadily higher over time. So, if history is any guide, the steep drop at the end of the graph below is likely to be yet another chance for long-term investors to buy a Dividend King while other investors are running for cover.
Obviously, there's no guarantee that this time around Nucor won't implode. But with a fairly modest debt-to-equity ratio of around 0.33 times (which is down from nearly 0.6 times a decade ago), it seems like the balance sheet is in solid shape. That should give the company more than enough financial leeway to navigate a downturn. It is also notable that Nucor's lowered fourth quarter 2024 earnings guidance, which led to a steep stock sell-off, was for earnings to fall between $0.55 and $0.65 per share. Yes, that's down from $3.16 per share a year ago and $1.05 in the third quarter. But the company is still profitable. Cleveland-Cliffs, a large peer that uses blast furnaces, lost money in the third quarter and will likely lose money again in the fourth quarter if analyst estimates are correct. In other words, Nucor looks like it is still at the head of the steel industry.
Make sure you know what you are getting into with Nucor
The story with Nucor is pretty simple. It is a reliable Dividend King operating in a cyclical industry. Although the dividend yield is fairly modest at around 1.8%, the broad steel industry's pullback suggests that now could be an opportunity to buy this well-run company while the rest of Wall Street is running scared. You may have to suffer through the weak patch the industry is facing, but a growing dividend and the company's strong business model should help you handle that hardship in relative stride.
