Investing in Construction Stocks

These are boom times for construction. Towering cranes have become a fixture of city skylines. New housing developments are popping up left and right. And the U.S. government has committed to spending $1 trillion on infrastructure to fix aging roads and modernize public transportation.

For investors, all this building represents an opportunity. Construction projects are complicated. There is a wide range of potential investments in companies that source raw materials, manufacture components, do the actual building, and manage projects from start to finish.

Construction companies, like many industrial stocks, are usually classified as slow and steady income stocks more likely to return money to shareholders than to double in value overnight. And while it is true that most (but not all) of the companies listed below pay a dividend, there are some construction-related companies that are well positioned to grow faster than the economy as a whole, thanks to their exposure to long-term spending trends.

For those interested in investing in this growth, here are some standout stocks to choose from.

Top construction stocks to buy

Caterpillar

Caterpillar is the manufacturer behind some of the biggest vehicles on the planet. The company is the world’s leading maker of construction and mining equipment, as well as diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

When construction demand is booming, Caterpillar has a lot of ways to win. The company sells heavy equipment for construction sites, and it also benefits from the corresponding boost in demand for raw materials that pushes mining companies to buy new equipment. Caterpillar also has a large financing arm, and the company makes billions annually on services and spare part sales.

It all adds up to a massive business. Caterpillar generated $51 billion in sales and $6 billion in free cash flow in 2021, allowing it to return $5 billion to shareholders via share repurchases and dividends – and still end the year with a $9.3 billion cash balance. Investors currently get a dividend yield of about 2%, giving them several ways to profit.

Nucor

Steel is the basic building block of a lot of heavy construction, and few are more efficient at making steel than Nucor. In the 1960s, the company revolutionized the steel manufacturing process, replacing the huge, inefficient blast furnaces traditionally used to blend metals with a cheaper process that melts scrap into usable steel bars.

Today, Nucor ranks among the largest U.S. steel manufacturers and has a reputation as one of the few able to remain profitable when demand wanes.

In 2021, Nucor earned $6.83 billion on sales of $36.48 billion. The company has also paid a dividend for 196 straight quarters. Investors today get a yield of 1.3% and should also benefit from Nucor’s push to repurchase billions of dollars worth of shares annually.

The steel industry has been the source of a lot of investor heartbreak over the years, with the industry forced to restructure under pressure from lower-cost foreign competition. There’s little Nucor can do about changes in demand for steel, but the company has a proven formula to keep costs low that has made investing in steel a good option for the first time in a generation.

United Rentals

When construction activity is brisk, a lot of small to mid-sized contractors need a lot more equipment than what they have on hand. United Rentals is the solution to that problem, offering a wide range of equipment from a network of more than 1,160 branches across North America and Europe.

United Rentals is North America’s largest equipment rental company, but it still has just 15% of a highly fragmented market. The company benefits from renting to a broad range of markets, including construction and utilities, helping it to generate steady results regardless of fluctuations in demand from individual sectors. Over the past decade, United Rentals has increased revenue at a compound annualized rate of 14% and earnings per share at a rate of 28%.

The company does not pay a dividend, preferring instead to return excess cash to investors via share buybacks. Since 2021, United Rentals has purchased the equivalent of 37% of total shares issued since 2012, meaning that each share an investor owns is worth more of the overall company now than it would have a decade ago.

Vulcan Materials

Vulcan is the country’s largest producer of construction aggregates, primarily crushed stone, sand, and gravel, as well as a major producer of construction materials including asphalt and concrete.

This is a business where scale really matters. It isn’t cost-effective to ship sand and stone thousands of miles to a job site. Vulcan’s network of more than 400 aggregates facilities, as well as 70 asphalt facilities and 240 concrete sites, are spread across the U.S., giving it nationwide exposure to construction activity and road building.

There is a lot of money to be made hauling rocks. Vulcan made a gross profit of $1.37 billion on sales of $5.56 billion last year, shipping more than 220 tons of product. And, in early 2022, Vulcan raised its dividend, providing an annual yield of about 0.9%.

Fluor

Fluor is a century-old engineering and construction company that has grown from humble beginnings as a Texas-based builder of oil rigs into a multinational giant. Fluor offers a range of services from project design and management all the way through to actual construction.

Buying into Fluor provides investors with exposure to domestic and international commercial and private sector construction, with an emphasis on megaprojects such as New York State’s replacement of the Tappan Zee Bridge.

Fluor generated more than $12 billion in sales last year and ended 2021 with a backlog of $18.9 billion more in future business. The company does not currently pay a dividend, but it has in the past.

NV5 Global

Think of NV5 Global as a scaled-down version of Fluor. NV5 is focused on the industrial engineering side of the business, providing professional and technical consulting services for government and business clients.

These services can include everything from environment impact assessments to code compliance to civil engineering and permit management. The company also manages projects, helping to make sure buildings are finished on schedule and as designed.

NV5 is smaller than some of its rivals, but that also gives it more growth-stock potential as it races to expand and take share. The company has more than doubled revenue over the past five years, from $333 million in 2017 to $707 million last year, and it expects to surpass $1 billion in sales by 2024. But, like many growth-focused companies, NV5 is investing its cash in expansion, and it does not currently pay a dividend.

Buy a construction basket instead

For those interested in construction stocks but who prefer not to buy individual equities, the Global X U.S. Infrastructure Development (BATS:PAVE) ETF provides exposure to a portfolio of construction companies, including many of the names listed above.

Are construction stocks right for you?

This list consists of a lot of different companies doing a lot of different things, and, indeed, construction is a broad sector. But what all of these companies have in common is exposure to commodity prices and business cycles.

It’s hard to predict the future, but construction looks poised for an extended upswing. Between the need for more housing and the government’s ambitious infrastructure renewal program, there should be a lot of demand for construction equipment and services in the years to come.

For those looking for some stability to balance out higher-risk growth stocks, the construction sector provides solid options that can build a strong foundation for your portfolio.

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