Buy Nucor Stock For Its Floor, Not Its Ceiling

Nucor (NYSE:NUE) will report earnings before the market opens on April 22. The company is expected to show strong growth from the prior quarter. The consensus of analysts is for the steelmaker to deliver earnings per share (EPS) of $3.08 on revenue of $7.2 billion. The whisper number suggests the company will deliver $3.13 EPS.

Steel is in high demand as the United States, and the world, is emerging from the Covid-19 lockdowns of 2020. And Nucor stands to gain from this as the largest steel producer in the United States. In addition to having the volume on its side, Nucor owns 25 mini mills that allows which allows it to deliver steel to different markets in a more cost-effective manner.

All of that suggests that NUE stock could break out of the range it’s been trading in since the end of March. But will it last and how should you view this as an investor?

Steel prices giveth and taketh away

NUE stock is up 114% in the last 12 months, and is 49% higher since the beginning of the year. Certainly Nucor has been a recovery play in the housing and auto sectors. And the company has benefited from rising steel prices.

Since late summer 2020, prices for many steel products are up anywhere from 50% to 100%. The increases took off in November and December which saw the announcement of vaccines, along with a new administration that was likely to look favorably on infrastructure projects. Even if the Biden administration’s infrastructure plan comes in lower than the proposed $1.9 trillion price tag, steel will remain in demand.

However, that doesn’t mean all the news for Nucor is bullish. According to the analytics firm IHS Markit, the surge in steel prices may be coming to an end.  The firm projects that after the spike in steel prices in Q1, prices will fall in Q2 and Q3 as mills have restarted which should alleviate the supply shortage.

A Strong Anchor Stock

So is all the good news priced into NUE stock? The answer may be yes. The stock is at historical highs. In fact, the last time the stock approached this level was in 2008. And that was right before the financial crisis and housing market collapse.

Put it another way. If you had purchased the stock five years ago, you would be sitting on a nice gain today. But all that growth has come in the last year. Prior to the onset of the pandemic your investment would have been flat in terms of stock price growth.

But fortunately, an investment in Nucor is not reliant on stock price growth. Nucor is one of the bluest of the blue chip companies. Its financial strength is reflected in its balance sheet and its dividend. In fact, the company has increased its dividend payout for 48 consecutive years putting it within striking distance of making the company a Dividend King (it’s currently a Dividend Aristocrat).  And it’s doing this with a dividend yield that currently stands at just over 2%.

Watch the Floor, Not the Ceiling

Should you buy Nucor stock? If you’re looking for growth, manage your expectations. There might not be much growth left in NUE stock. Some recent price targets say the stock may climb another 10%. However, the consensus price target of analysts suggests a price of $63.55. While that’s about a 20% decline from the stock’s current level, it’s still about 30% higher than the stock was trading in February 2020.

However as a dividend stock in your portfolio I would say absolutely go long. In the five years prior to the pandemic, NUE stock was establishing a higher and higher floor. Strong demand should continue to keep the stock price from falling too far. And you’ll collect a regular dividend regardless of how the stock price moves.