Nucor NUE has a fantastic historical record of growing shareholder return.  Shareholders in Nucor have realized a 17% CAGR since the year 2000, a return that thoroughly beats the overall market.  Even better, The company has not laid off an employee due to work shortages in over 30 years.  The practice of avoiding layoffs is a rarity in the cyclical steel industry.  Nucor has accomplished its fantastic record of growth through treating its employees well.  The company is one of the largest adopters and pioneers of the “pay for performance” employee incentive program.  Employees as a whole are guaranteed at least 10% of the company’s profits, aligning employee incentives with shareholder and management incentives.

The company’s management is “confident the company’s best years are ahead”, but long-term macroeconomic conditions suggest otherwise.  Nucor operates in the highly cyclical steel industry.  The steel industry is currently in a down cycle, which has depressed the price of Nucor.  The image below shows how the company’s Price to Book ratio hovers around 3.5 when the U.S. Steel market is booming (pre 2009 in the picture), versus an average of below 2.0 when the U.S. Steel market is slumping.

Source:  Ycharts

The company has upside if you believe U.S. steel will soon experience a boom.  Unfortunately for Nucor and the U.S., this does not appear likely. 

Rising Steel Imports Hurt Domestic Producers

International producers of steel are heavily subsidized by their governments.  China is now subsidizing up to 80% of its country’s steel production profits.  Cheap international production fueled by government subsidies creates an unfair advantage for non U.S. steel companies.  Further, U.S. companies are at a structural disadvantage due to higher labor costs in the U.S. than in many international markets.  Together, these factors have caused imports as a percentage of total U.S. steel consumption to rise from a low of about 15% to near 30% over the past 5 years.

Source:  U.S. Department of Commerce

The U.S. government has taken notice of the uncompetitive practices in international markets and raised anti-dumping cases against Mexico, Turkey, and China.  Despite these anti-dumping remedies, steel imports in the U.S. continue to rise.

The Economy Is Recovering Slower Than Expected

The vast majority of Nucor’s revenue and profits come from the U.S.  The company does have a joint venture operations in Italy and Mexico, but the real value of the company comes from its U.S. operations.  As a result, Nucor’s growth is tied to the growth of the U.S. as a whole, and non-residential construction in particular.  According to the company’s 2013 annual report, sluggish U.S. growth continues to cause headwinds for Nucor:

Our nation’s unemployment rate remains high due to the loss of millions of jobs during the recession, the slow pace of the recovery and the uncertainty surrounding domestic fiscal policies. In the face of these economic headwinds, the pace and degree of recovery has been weak and uneven at best, and it has been experienced in fits and starts. While there has been some recent traction gained in single-family housing starts, nonresidential construction (the sector to which we are most closely tied) has continued to languish.

There is simply no catalysts on the horizon that can spur the overall U.S. economy.  The federal reserve has already reduced the federal fund target rate to between 0% and 0.25%, effectively creating very cheap borrowing rates in an effort to encourage growth.  In addition to these low rates, the U.S. has leveraged itself significantly.  The outstanding U.S. public debt is $17.76 trillion dollars, while the current U.S. GDP is $17.29 trillion.  For the first time since World War II, the U.S. has a debt to GDP ratio of over 100%.  In the excellent paper Growth In a Time of Debt by Carmen Reinhart and Kenneth Rogoff, a link between high debt and stagnant growth is historically shown. Developed countries with a debt to GDP ratio greater than 90% have historically grown real GDP at under 2% a year.

Source:  Growth In a Time of Debt

You Don’t Get Bonus Points for Difficulty

There is a chance that Nucor steel rebounds from its current lows.  The U.S. could impose harsher tariffs on international steel imports.  The price of steel could sky rocket.  If the steel market remains depressed long enough, weaker competitors may go out of business and reduce the excess capacity that currently plagues the steel market.  The U.S. economy could buck the historical trend of slow growth in developed economies with high debt.  Nucor is currently attempting to reposition itself into higher margin steel related businesses.  The company may be able to grow its new lines rapidly and reward shareholders through innovation.

All of the above categories require significant changes from the way the steel industry is today.  When looking for Dividend Aristocrats suitable for long-term holding, I look for high quality businesses trading at fair or better prices.  Nucor was once a high quality business.  It is currently facing significant headwinds on a macroeconomic scale.  The difficulty investors face in the company reminds me of a quote from Warren Buffett:

Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count.

Final Thoughts

Nucor has significant upside if the economic environment in which it operates changes substantially.  The company is a significantly riskier investment option than the majority of Dividend Aristocrats available.  Due to its high risk and over exposure to the U.S. steel industry, Nucor does not receive high marks for safety.  I believe there are better Dividend Aristocrat investment opportunities available for enterprising investors.