This Dividend Aristocrat Has Big Expectations for 2022. Can It Live Up to Them?

As the largest and most diversified steelmaker in the United States, Nucor (NYSE: NUE) has a lot going for it, including a string of more than 40 consecutive annual dividend increases — more than enough to qualify it as a Dividend Aristocrat.

Right now, Nucor is posting record results. But there are some important issues to consider as you watch the company work toward a record-breaking year in 2022.

Another great quarter

Nucor posted revenue of $11.79 billion in the second quarter of 2022, up 12% sequentially from the first quarter of the year and 34% higher than the second quarter of 2021. Earnings per share came in at $9.76, up from $7.67 per share in the first quarter of the year and $5.04 in the second quarter of 2021. It was a record-setting quarter that followed what management noted was the most profitable first quarter in the company’s history.

Image source: Getty Images.

There’s no question that this steel giant is doing very well right now. And management noted that “demand remains stable and resilient across the major end-use markets we serve.” Which, it believes, will lead to strong profitability in the back half of the year and turn 2022 into the “most profitable year in Nucor’s history.”

That’s great news for investors in some ways, but don’t get too excited. There’s some bad news hidden in the good news here.

Down from the peak

For example, in the second quarter, steel prices were up 44% year over year, but volume was lower by 3%. Clearly, the huge quarter was driven by commodity price increases in the highly cyclical steel sector. If demand starts to cool, then prices are likely to follow. The fear of a recession as the Federal Reserve hikes interest rates at a rapid clip makes this a very real concern.

Then there’s the math of the company’s recent string of strong results. In 2021, Nucor’s earnings were more modest in the first and second quarters and then strengthened considerably in the second half. So, right now, the company is lapping relatively weak comparison periods.

That’s going to change in the third and fourth quarters. Results will likely be good but perhaps not as impressive as they were in the first half. Even if third- and fourth-quarter earnings were flat year over year or just down a little, the full year could easily come in at record levels. However, investors may not be satisfied, given the potential shift to a slower trend in earnings growth.

NUE EPS Diluted (Quarterly) data by YCharts.

This isn’t a small issue when you consider that Nucor’s stock is up over 340% since it bottomed during the pandemic-driven bear market in 2020. That period was marked by a drop in demand, thanks to government efforts to slow the spread of the coronavirus. But a lot of good news has since been priced into Nucor’s shares as the steel market rebounded. Record results appear to justify investor sentiment here, but the stock is also off around 20% from its recent peak. Clearly, the current bear market is part of that. And yet, if investors are in a dour mood, it makes sense that they might react negatively to historically strong but still slowing earnings results.

It is worth remembering that as a Dividend Aristocrat, Nucor has shown that it can reward investors with an ever-growing stream of passive income amid the ups and downs of the cyclical steel industry. In fact, a key goal for the company is to invest through the cycle so it can produce both higher highs and higher lows, in terms of sales and earnings.

Fewer records going forward

At this point, Nucor’s ability to keep breaking earnings records is going to come up against increasingly hard comparisons as 2022 progresses. It could easily fall short of previous-year results in the back half and still post a record-breaking 2022. Given the cyclical nature of steel and the risk of a recession (the United States has already posted two quarters of negative GDP, the unofficial measure of a recession), it wouldn’t be shocking to see the steel giant’s results start to pull back. Investors are likely to react less positively if that happens.

For long-term dividend investors, stock pullbacks often present buying opportunities. Given Nucor’s price gains, and its historically modest 1.5% dividend yield, Nucor looks a bit expensive right now. A price drop that pushes the yield up toward 3%, however, would make this dominant steel maker quite attractive for income investors with a long-term view.

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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