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This Dividend Growth Stock Is Doing Better Than Wall Street Thinks

Motley Fool - Sat Jan 13, 5:02AM CST

The steel industry is highly cyclical, and investors in the sector just need to accept that. To help deal with this situation, however, companies like Steel Dynamics(NASDAQ: STLD) have taken to providing earnings guidance updates close to their actual earnings releases. In this way, it can avoid unexpected surprises. This time around, though, Wall Street's thinking was way off the mark. And that was good news.

Steel Dynamics has a strong dividend history

When you compare Steel Dynamics to industry icons like United States Steel(NYSE: X), which has been around for over 100 years, it is a relative upstart. Even industry bellwether and Dividend KingNucor(NYSE: NUE), which has been operating in the steel sector for roughly 50 years, is a much more established competitor.

A steel mill with sparks flying and person in the foreground.

Image source: Getty Images.

But don't think Steel Dynamics is a steel industry also-ran. It has grown materially since it opened shop. And while its 13-year streak of dividend increases can't hold a candle to Nucor's 51 years, it trounces its larger peer in an important way. Dividend growth over the past decade has come in at an annualized rate of 16%. Nucor's annualized dividend growth over that span was roughly 3%.

In Nucor's defense, it is much easier to grow a small company than it is to grow a large company. And Nucor is a much larger company. But that shouldn't diminish Steel Dynamics' accomplishment. The company is a dividend growth machine, with the annualized hikes over the trailing one-, three-, and five-year periods coming in at even higher rates. Investors looking for a dividend growth play in the steel sector would likely be happier with Steel Dynamics than they would be with Nucor.

STLD Dividend Chart

STLD Dividend data by YCharts

Steel Dynamics surprises Wall Street

But a company can't increase its dividend like Steel Dynamics has without also performing well as a business. And that's where a recent earning guidance update from the company comes in. Volume and prices have been a trouble spot in the steel sector, highlighted by Nucor's warning that its fourth-quarter 2023 earnings would be down sequentially, and materially, from its third-quarter showing.

Steel Dynamics made a similar announcement. The company provided "fourth quarter 2023 earnings guidance in the range of $2.60 to $2.64 per diluted share. Comparatively, the company's third quarter 2023 earnings were $3.47 per diluted share and prior year fourth quarter earnings were $3.61 per diluted share." The difference here is that Wall Street thought Steel Dynamics' update would be worse, expecting around $2.46 per share. The stock price rose on the news.

Ultimately, while Nucor cited weak pricing and demand, Steel Dynamics presented a picture that was a bit more mixed across its vertically integrated business. And that rolled up to a guidance range that was better than analysts had been expecting. What it shows is that Steel Dynamics continues to execute well even in a tougher operating environment. Dividend growth investors should appreciate that.

Not a bargain, but worth watching

Steel Dynamics' 1.5% dividend yield is near its lowest levels over the past decade. It is hard to suggest that it is a screaming buy here, even if you favor dividend growth over yield. That said, given the company's strong performance over time, dividend growth investors would be well advised to keep this stock on their wish list. When the next recession comes along, a time when steel stocks are likely to be indiscriminately punished on Wall Street, you'll probably want to be buying while everyone else is selling.

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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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