Steel Dynamics (NASDAQ: STLD) is one of the largest steel makers in North America, built from the ground up by alumni of Nucor (NYSE: NUE), the biggest domestic player. Steel Dynamics has been growing its business and dividend quickly, but the most recent dividend increase was different. Here's the backstory for Steel Dynamics' massive 31% dividend hike.
Big numbers and bigger numbers for Steel Dynamics
Over the past decade, Steel Dynamics has increased its dividend at a compound annual rate of roughly 10%. That's a pretty big number for any company, let alone one that operates in a highly cyclical industry like steel. The relatively young company has a 12-year streak of annual dividend increases under its belt. For context, Nucor's annual streak is around 50 years long, but its average dividend increase over the past decade was only in the low single digits.
Here's the thing: In late 2021, Nucor hiked its dividend by an outsized 23%. Steel Dynamics, essentially, followed along on that path, hiking its dividend by 31% in the first quarter of 2022. There are two pieces here that need to be broken apart to fully understand the logic in play for these increases.
Good times for steel production
On the surface, investors might attribute the dividend hikes at these two steel makers to the record performances achieved in 2021. Indeed, both companies produced revenues and earnings there were, without a doubt, above anything they had ever achieved before. To put a number on that for Steel Dynamics, it had revenue of $9.6 billion in 2021, but the top line was nearly double that, at $18.4 billion, in 2022. Some of that increase was related to the waning impact of the pandemic, of course, but in 2019, before the pandemic, the company's revenues were still only $10.5 billion.
Any way you look at it, 2021 was a great year, with full-year earnings coming in at $15.56 per share, up from just $2.59 in 2020 and $3.04 in 2019. Solid results flowed into the first quarter of 2022 as well, with second-quarter numbers likely to continue at an elevated clip. While such impressive earnings help support the giant dividend increase, Steel Dynamics knows full well that it operates in a cyclical industry, and the current good times won't last forever.
The long-term picture
Here is where a more important factor comes into play. Steel Dynamics has been making capital investments in its business. That's right out of the playbook that Nucor uses. Nucor's goal is to produce higher highs and, more to the point here, higher lows, by constantly investing in its operations. Steel Dynamics is a smaller and faster-growing steel mill than Nucor, but it is really trying to do the same thing.
To put a number on that, Steel Dynamics' capital spending rose 450% between 2019 and 2020, leading to a near doubling of the company's tangible book value per share between 2019 and 2021. That was largely due to a large new steel plant that's ramping up in 2022. In other words, the company is bigger than it was just a few years ago and can support a higher dividend because a bigger business can generate more cash flow and earnings. There are more investments on the horizon, as well.
A good playbook
Steel Dynamics is, essentially, doing the same thing that has served Nucor and its shareholders so well for so long. And that is translating into sizable dividend growth. Right now, however, Steel Dynamics' market cap is less than half that of Nucor's, meaning growth is likely to be easier to come by because of its relatively modest size.
For investors looking at the steel industry, Nucor is the 800-pound gorilla that's appropriate for conservative types, while Steel Dynamics looks like the growth story for more the more aggressive income investor. The key is that Steel Dynamics has created a step-change in its business -- and that is the real reason investors should be so pleased by the big dividend hike.
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Reuben Gregg Brewer has positions in Nucor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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