Nucor Corporation (NUE) Dividend Stock Analysis

Nucor Corporation and its subsidiaries engage in the manufacture and sale of steel and steel products in North America. It operates in two segments, Steel Mills and Steel Products.
Nucor Corporation is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 34 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 14.70 % to its shareholders. This year however the stock is down about 40% as the commodity boom seems to have dried up the demand for materials, including steel, across the globe.

At the same time company has managed to deliver an 24.20% average annual increase in its EPS since 1998.

The ROE has increased from 13% range in 1998 to 30% by 2007.

Annual dividend payments have increased by an average of 39.70% annually over the past 10 years, which is much higher than the growth in EPS. Nucor’s last quarterly payment of $0.52/share consisted of $0.32 of regular dividend and $0.20/share in supplemental dividends.
A 40% growth in dividends translates into the dividend payment doubling almost every 2 years. If we look at historical data, going as far back as 1973, NUE has actually managed to double its dividend payment every four years on average. The last major dividend raise was between 2005 and 2006 when dividends increased by a whooping 475% in one year, helped by increased demand for metals worldwide. After this major move total dividends paid have actually decreased by 15% mainly because of a decrease in the supplemental dividends.

If we invested $100,000 in NUE on December 31, 1998 we would have bought 9249 shares (Adjusted for two 2:1 stock splits in 2004 and 2006). In March 1999 your quarterly dividend income would have been $300. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $5806 by September 2008. For a period of 10 years, your quarterly dividend income would have increased sixteen times. If you reinvested it however, your quarterly dividend income would have increased over nineteen times!
Investors should proceed with caution in the future as such dividend growth rates are definitely unsustainable given the recent collapse in commodities prices and talk about deflation and depression.

The dividend payout has slowly increased from upper twenties to high forties over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that NUE is attractively valued with its low price/earnings multiple of 5, a not too high DPR, as well as an above average dividend yield at 5.90% (3.80% if you only count the base dividend). The current dividend yield is way above average for this stock which could compensate for the lower expected growth in company’s fundamentals or even be a warning sign that Nucor’s dividend is in danger.

I do believe that NUE is an attractive buy candidate on dips below $32, since it adds some further diversification exposure to a dividend growth portfolio. Since Nucors main business, steel is a highly cyclical business I would proceed in purchasing NUE stock cautiously. Over the next few years I wouldn’t be surprised if this stock retraces all of its gains during the 2003- 2007 bull market and ends up below $20/share.

This post appeared on 114th Edition of the Festival of Stocks.

Chevron Corporation (CVX) Dividend Stock Analysis

Chevron Corporation operates as an integrated energy company worldwide. The company’s organized into several segments including Petroleum operations, chemical operations coal mining, power generation,insurance, and real estate activities.

Chevron is a dividend achiever as well as a component of the S&P 500 and Dow Jones Industrials indexes. It has been increasing its dividends for the past 20 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 11.10 % to its shareholders. The stock has lost about four percent of its value so far in 2008.

At the same time company has managed to deliver a 27.00% average annual increase in its EPS since 1999, supported by the commodities bull market of the past decade.

The ROE fluctuated between 5% and 35%. The past couple of years have been characterized by higher returns on equity. 

Annual dividend payments have increased over the past 10 years by an average of 7.10% annually, which is much lower than the growth in EPS. Using the rule of 72 a 7% growth in dividends translates into the dividend payment doubling almost every ten years. If we look at historical data, going as far back as 1988, CVX has indeed managed to double its dividendpayment every ten years on average. 

It’s interesting to note that both XOMand CVX have not kept pace with the EPS increases by raising their dividends accordingly. Instead those oil behemoths have decided to make stock buybacks, which are not as reliable as dividend payments over the long run. I think that CVX and XOM management probably have not increased dividends as fast as earnings because they consider the current commodities boom to be of short term nature.

If we invested $100,000 in CVX on December 31, 1998 we would have been able to purchase 2411 shares (Adjusted for a 2:1 stock split in 2004). In February 1999 your quarterly dividend income would have been $735. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $2115 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 113%. If you reinvested it though, your quarterly dividend income would have increased by 188%.

The dividend payout has remained below 50% after 2003. Before that the payout had followed the wide fluctuations in earnings rising above 100% on several occasions. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

CVX does look attractively valued with its low price/earnings multiple of 9, low DPR as well as attractive yield at 3%. If I had to choose between XOMand CVX, the latter would be the obvious candidate for me. I will look forward to entering a position into thisstock on dips.

Disclosure: I do not own shares of CVX

Relevant Articles:

- BP (BP) Stock Dividend Analysis

- XOM Dividend Analysis

- Emerson Electric (EMR) Dividend Analysis

- Wal-Mart Dividend Analysis

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Dividend Stocks in the news over the past week

The past several months have been characterized by tremendous volatility and a lot of negative news regarding the state of the economy as a whole. Given the uncertainties in the global economy, investors are wondering whether they should cash out their portfolios and simply wait for the storm to end.

I think that this would not be a good move, especially for the dividend investor who already has adiversified portfolio of income producing stocks. Such an investor will be more focused on the dividend raises that his or her stocks deliver.

Investors focusing on every tick of the market might miss some rare investment opportunities when there is a disconnect between fundamentals and price. Don’t forget that even during a crisis people will continue to eat, shave, take showers, purchase beverages, smoke and eat out. Thus it always pays to not lose track of the big picture, even during the most challenging times for your portfolio.

Several stocks had some major dividend increases over the past week. Others didn’t deliver such exciting news but reaffirmed their payments to shareholders.

McDonalds increased its annual dividend by 33% to $2.00 share. The company has increased its dividends for over 32 consecutive years. Annual dividend payments have increased over the past 10 years by an average of 25%. The current yield stands at 2.40%. The new dividend increases the yield to 3.16%

Microsoft increased its annual dividend by 18% to $0.52 share. The company has increased its dividends since 2003. MSFT has recorded double digit annual dividend payment increases over the past 5 years. The current yield stands at 2.00%.

Accenture increased its annual dividend by 19% to $0.5 share. The company has increased its dividends since 2005. ACN has recorded double digit annual dividend payment increases over the past three years. The current yield stands at 1.26%.

Campbell Soup increased its annual dividend by 14% to $1.00 share. The company has increased its dividends every year since 2004. CPB has recorded double digit annual dividend payment increases over the past 4 years. The current yield stands at 2.30%. The new dividend increases the yield to 2.66%

Lockheed Martin increased its annual dividend by 36% to $2.28 share. The company has consistently increased its dividends every year since 2003. LMT has recorded double digit annual dividend payment increases over the past 5 years. The current yield stands at 1.50%. The new dividend increases the yield to 2.03%

Of these stocks MCD only fits my criteria for purchase. The rest of the stocks have been added to my watchlist for further investigation.

International Dividend Achievers for diversification

So far I have concentrated my attention primarily on the Dividend Aristocrats and the High-Yield Dividend aristocrats, both published by the S&P. Those lists include companies which are members of the S&P 1500and which have raised their dividends for more than 25 consecutive years. I have also tried investigating the Broad Dividend Achievers as well, which are stocks that have increased their dividends for at least ten consecutive years.

That wasn't enough for me, however. In my quest for creating a diversified portfolio I have been searching for international dividend growers. There are several lists out there that focus on international dividend growth stocks – Mergents International Dividend Achievers index, S&P/TSX Canadian Dividend Aristocrats, S&P Europe 350 Dividend Aristocrats (EUR).
The list that caught my attention was the International Dividend Achievers list, prepared by Mergent Inc. It is broader than the S&P Europe and Canadian dividend aristocrat’s lists. To quote from the company's website:

The International Dividend Achievers™ Index is designed to track the performance of dividend paying American Depositary Receipts and foreign common stocks trading on major US exchanges. To become eligible for inclusion in the International Dividend Achievers Index a stock must be incorporated outside the United States, trade on the NYSE, NASDAQ or AMEX, and have increased its annual regular dividend payments for the last five or more consecutive years. In addition, requires that a stock's average daily cash volume exceed $500,000 per day in Nov. and Dec. prior to reconstitution.

The international dividend achievers index has closely tracked its benchmark over the past 10 years. It performed better than the benchmark in only 3 of the past 10 years however.

According to Mergents Inc, a $10,000 investment in the International Dividend Achievers Index ten years ago would be worth about $19,279 by the end of July 2008.

There's an ETF that tracks the index. The Ticker is PID.

Relevant Articles:

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The ultimate passive investment strategy

I recently read a paper from Jeremy Siegel and Jeremy Schwartz titled “The Long-term Returns on the Original S&P 500 Firms”.

In this paper the authors calculate the total returns of a buy and hold of the original 500 companies in 1957. They found that on average 20 stocks annually have been added and deleted from the index (without considering that a merger of two S&P 500 companies is an addition to the index) since 1957. The authors also used three methods of calculating the returns:

Survivors’ Portfolio (SP). The survivor portfolio consists only of shares of the original S&P 500 firms. Shares of other firms received through mergers are immediately sold and the proceeds invested in the remaining survivor firms in proportion to their market value. For example, when Mobil Oil was merged into Exxon in 1999, shareholders of Mobil are assumed to sell the shares they received from Exxon-Mobil and invest the proceeds in the remaining survivor firms. All spinoffs are immediately sold and the proceeds reinvested in the parent firm. Funds received from privatizations are sold and the proceeds re-invested in the original surviving firms in proportion to their market value.

Direct Descendants’ Portfolio (DDP), which consists of the shares of firms in the survivors’ portfolio plus the shares issued by firms acquiring an original S&P 500 firm. In the case of the Mobil-Exxon merger discussed above, we assume that shareholders of Mobil Oil hold the shares of Exxon that were issued in the merger. If an original firm was taken private, we assume that the cash distributed from the privatization was invested in an indexed portfolio whose returns matched the standard S&P 500 Index.12 If a firm that was taken private is subsequently reissued to the public again, we assume the portfolio repurchases shares in the reissued company with the funds that had been invested in the index at the time the firm went private. As before, spinoffs are immediately sold and the proceeds reinvested in the parent.

Total Descendants’ Portfolio (TDP) and includes all firms in the DDP plus all the spinoffs and other stock distributions issued by the firms in the Direct Descendants’ Portfolio. The only difference between the TDP and the DDP is that the TDP holds all the spinoffs rather than sell them and reinvest in the proceeds in the parent firm. The TDP is identical to the portfolio of a totally passive investor who holds all the spinoffs and shares issued from mergers and never sells any stock.
My favorite portfolio is the Total Descendants portfolio, since it basically represents a very passive investment strategy – buying stock in 500 companies and then forgetting about them for 50 years.

The authors looked into the return of equal weighted and value weighted returns for the three calculation types.

At the end of the paper they determined that by not updating your portfolio of the original 500 companies, with the annual changes in the S&P 500, you’d have outperformed the average pretty handsomely.

My take on this research is that by purchasing the current 500 stocks in the S&P 500, and allocating all stock equally, an investor will be better off in the long run than simply purchasing an ETF. The reason is that ETF’s tend to charge fees of 0.1% annually, which could really add up over time.

The price of higher current yield -Canadian Royalty Trusts

There are several Canadian royalty trusts which trade on the NYSE.

Advantage Energy Income Fund (AAV), based in Calgary, currently yields 11%. Its monthly dividendpayments have declined from $0.23/unit in 2004 to $0.12/unit in 2008.

Baytex Energy Trust (BTE), also based in Calgary, currently yields 7.50%. Its monthly dividend payments have increased from $0.16/unit in 2006 to $0.20/unit in 2008.

Enerplus Resources fund (ERF) currently yields 10.70%. Its monthly dividend payments have greatly fluctuated between $0.20/unit and $0.52/unit since 2000.

Harvest Energy Trust (HTE) currently yields 14.40%. Its monthly dividend payments have fluctuated significantly less than other trusts – between $0.29/unit and $0.36/unit since 2005.

Pengrowth Energy Trust (PGH) currently yields 13.50%. Its monthly dividend payments have also fluctuated significantly less than other trusts – between $0.19/unit and $0.23/unit since 2004.

Penn West Energy Trust (PWE) currently yields 12.20%. Its monthly trust distributions have fluctuated between $0.29/unit and $0.35/unit since 2006.

They do look appealing to investors because of their high dividend yields of 10%-15% annually. Not only are the dividends paid monthly, which allows for a better dividend income compounding, but some of them also allow investors to purchase shares through DRIPs at discounted prices. Unlike most other “normal” stocks, dividend payments from the Canadian income trusts tend to fluctuate a lot.

Most trusts are engaged in oil and gas production and have average reserve lives of about 10 years. Unlike similar US trusts however, Canadian Royalty trusts can purchase new assets and make acquisitions, which could extend their lives forever.

The Canadian government applies a 15% non-resident withholding tax on distributions to U.S. investors. U.S. investors can apply for a refund for at least a portion of the amount withheld. Many Canadian trusts provide information for income tax filing instructions for U.S. unitholders on their Websites. Nevertheless, it can be a complicated process at tax time, thus U.S. investors should consult with a qualified tax advisor before investing.

Like any other investment that offers above-average dividend yields however there’s a catch: the reason why CanRoy’s are able to pay huge dividends is because they are not taxed at the corporate level and pass all of their income to shareholders. This is going to change in January 2011. Since many trusts pay all of their income in distributions to unit holders, they expand their operations through sales of additional units. The uncertainty related to the 2011 tax law changes make it difficult for trusts to expand. For example trusts that were formed before October 31 2006 cannot sell more than a certain amount of new units (stock), otherwise they will lose their preferential tax status even earlier than 2011.

Under the existing provisions of the Tax Act, income trusts can generally deduct in computing their income for a taxation year any amount of income that they distribute to unitholders for the year. According to the new bill, introduced in 2006, Income trusts will not be able to deduct certain portions of their distributed income (referred to as specified income).
Pursuant to the draft legislation, the distribution tax will only apply in respect of distributions of income and will not apply to returns of capital. Some trusts have substantial tax pools that could be applied to reduce the impact of the new tax for several years post-2011.

Under the new legislation the proposed tax will be 29.5 percent in 2011 and 28.0 percent in 2012 based upon a 13 percent provincial tax rate and a federal tax of 16.5 percent reducing to 15 percent in 2012. Add this to the 15% tax that US investors already pay on income trust distributions, and the higher yields might not look so good. Under the budget released by the Minister of Finance on February 26, 2008, the 13 percent provincial tax will be replaced under an allocation formula with the applicable provincial incometax rates for each province in which the income trust has a permanent establishment. Trust are likely to continue to take advantage of growth opportunities with an increased focus on assessing international acquisition opportunities given that revenue from outside Canada will likely not be subject to the new tax. In addition, trusts will likely continue to carefully manage their substantial tax pools to mitigate the impact of the new tax on our unitholders.