Nucor Increases Its Dividend Again

Nucor Corporation (NUE) has been around since 1940 and is the largest steel producers in the world. The company is the largest recycler of steel products and one of the largest recyclers of any metals. Nucor relies on its mini mills to efficiently melt scrap metal. Nucor operates 53 steel locations in the United States. The company has been very aggressive in expanding in recent years adding Harris Steel and DJJ to increase its reach.

Nucor’s chief competitors in the steel industry are US Steel, Mittal Steel, and AK Steel. The steel industry is a competitive marketplace with steel companies pricing power based entirely upon demand for steel products. The global recession has hit steel company stocks especially hard with most companies reporting negative earnings over the past two years. Nucor has been a shining star in a downtrodden industry.

Nucor is on pace to book $15.7 billion dollars in sales this year. That’s a 40% increase over last year’s results. Nucor is an effectively managed company producing almost the equivalent revenue of U.S. Steel with half the number of employees. The company’s great management can be seen in its fortified balance sheet and consistent operating results.

Last quarter Nucor earned a net profit of $23.5 million which resulted in earnings of 7 cents per share. This was below Wall Street forecasts of 11 cents per share. Any positive earnings growth is impressive in the steel industry due to the challenging environment. The bright spots were in quarterly sales which were up 33% and shipments which rose 10%. Unfortunately revenue was down 1%.

Nucor has the best balance sheet in the steel industry with $2 billion dollars in cash. The company has $6 per share in cash alone. Nucor generates nearly half a billion dollars in free cash flow. Margins have been depressed due to the pricing concerns. The company’s profit margin is 1.3% and operating margins are 3.7%. Return on equity and return on assets both came in at 2.7%.

Shares of Nucor currently trade at nearly 80 times this years earnings of 50 cents per share. The P/E is misleading considering that the company has faced a global slowdown not seen since the great depression. Nucor’s earnings are expected to rebound drastically and come in at $2.27 per share next year. Growth is forecast at 15% for the next 5 years which is remarkable for an industry which typically sees growth in the low single digits.

The company is a dividend darling. The dividend has tripled over the past three years and Nucor has increased its dividend 10 times from where it was back in the year 2000. The company has a history of rewarding shareholders having increased its dividend for 38 consecutive years. Nucor is currently yielding 3.50% as the company just increased its dividend to $1.45 per share last week.

Investors that want to own a piece of a great company with a growing dividend should feel comfortable buying Nucor Corporation.

Qualified Dividends

Qualified dividends are currently a subject of frequent discussion in the national news media, especially in relation to the future status of US federal government tax cuts. The IRS (Internal Revenue Service) classifies these dividends as dividends meeting certain requirements that allow them to be taxed at the lower long-term capital gains tax rate rather than the higher rate, according to an individual’s yearly income. Because Obama reached a deal with Republicans to extend the Bush tax cuts the current rates will stay in place.

For the years 2003 to 2007, such dividends were taxed at 15% or 5%, relative to the taxpayer’s income tax bracket. From 2008 to 2012, the tax rate for such dividends fell to 0% for each taxpayer within the 10–15% ordinary income tax brackets.

To satisfy the necessary criteria to be taxed at these rates, dividends must be paid on a date falling between January 1, 2003 and December 31, 2012. They must be paid by a US corporation, a business incorporated in a US possession, or a non-US corporation in a country qualified to receive benefits according to certain stipulations of a US tax treaty. Such dividends can also be paid on a non-US corporation’s stock which is eligible for trading in the US stock market. Also, the taxpayer must have held the stock for greater than 60 days during the 121-day requirement period. When calculating the number of holding days, count the day the stock was given up by the taxpayer, but not the day he or she originally acquired it.

The Bush tax cuts have been extended until 2012. Unless Congress votes to extend the Bush tax cuts (which became law during the administration of former US President George W. Bush), or passes other legislation to maintain current or similar tax rates on these dividends, these rates will change. After December 31, 2012, dividends of all types will be taxed at the rate of ordinary income, with income tax rates reverting to the rates prevailing in the year 2000. In fact, the maximum tax rate on dividends will soar to 39.6%.

The only fact that is certain today is that tax rates will increase for everyone concerned unless Congress takes action again in 2012. Decisions must be made and agreed upon by Congress and the President. Let’s hope they decide on a tax plan including multiple income brackets and qualified dividends which is agreeable with US taxpayers’ paychecks, profits (or losses), and pocket money.

Heinz Has A Sweet Dividend

Heinz is number one in the United States when it comes to ketchup. The company is headquartered in Pittsburgh, Pennsylvania and sells over 150 food products in over 200 countries worldwide. H.J. Heinz sells mustard, relish, pickles, gravy, vinegar, prepackaged meals, sauces, and frozen food products under the Ore Ida, Weight Watchers, Bagel Bites, Boston Market, TGI Fridays, and Budget Gourmet brand names.

Heinz competes in the diversified foods segments against Conagra and Campbell Soups. Conagra Foods is the biggest competitors to Heinz’s signature brand with its Hunt’s ketchup product. Heinz is still the biggest player in the industry with its $15.5 billion dollar market cap and $10.5 billion dollars in sales. Heinz’s gross margins and operating margins are superior to all industry competitors except for Campbell Soup.

Heinz has been able to increase earnings 6.40% over the past five years and is expected to increase earnings 6.8% over the next five years. The company generates 55% of its earnings from United States, Canada, and Mexico. Heinz had a solid earnings report last quarter in which the company saw earnings grow 8.60% despite sales declining 1.2%.

The company’s management team has done a great job of spreading the Heinz brand internationally. Heinz has a wide economic moat as the company’s name is synonymous with ketchup throughout the world. Management has also done a great job of managing company assets. Return on equity is extremely high at nearly 44% and return on assets is up to nearly 10%.

The company has bolstered its balance sheet over the past two quarters increasing their cash position to $728 million dollars. Heinz also reduced its debt load from $4.7 billion to $4.4 billion dollars. H.J. Heinz generates significant amounts of free cash flow bringing in over $1.4 billion dollars this year.

Sales growth is estimated at 3 to 4% over the next year by the company and earnings are expected to grow 7 to 10% over the next five years. Shares currently trade near their 52 week high of $48.80. The stock is a bit expensive since it is currently selling at nearly 16 times earnings, 2.4 time earnings growth, and 1.5 times sales. These numbers are slightly higher than the industry average.

Heinz pays investors $1.80 per share and the stock is currently yielding 3.70%. The current dividend yield is slightly higher than the historical yield of 3.50%. The current dividend payout is 61% of earnings. Heinz has a history of increasing its dividend with the company raising its dividend 7.1% six months ago. Heinz has increased its dividend nearly 67% over the last seven years for a compound annual growth rate of 7.6%.

In my opinion Heinz is a solid investment but is a little pricey at $48. The stock would be more attractive to income seeking investors at $45 a share.