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What Nucor's String of Acquisitions Means for Investors

While it may not be a household name, Nucor (NYSE: NUE) is well known to its shareholder base as North America's largest steelmaker by market capitalization. And that base of investors knows that the company's capital allocation philosophy is first to invest for profitably growing the business. It also seeks to utilize free cash flow to grow its base dividend and then for share repurchases and supplemental dividends.

Nucor generated $4.6 billion in free cash flow in its record year last year, and it used that to help fulfill all of its capital allocation goals. Digging into the details of those investments can give an investor a good idea of what that might mean for Nucor shareholders going forward.

Largest acquisition in history

Nucor closed the largest acquisition in its history on June 24 with the $3 billion purchase of C.H.I. Overhead Doors from global investment firm KKR. That asset will join Nucor's downstream products group and immediately provide an additional customer for its growing steelmaking segment and a driver of new business.

The deal added to the long list of recent acquisitions and growth investments made by the company in recent years. The pace of those investments has accelerated as Nucor's business has thrived over the past year.

Data source: Nucor. Chart by author.

The company has spent more than $12 billion on these growth initiatives over the past five years. But that's not the only way Nucor has been spending money.

Shareholders take note

All of those investments are meant to result in long-term growth. The steel business is cyclical, but cash flows for Nucor should bring higher highs and higher lows through those cycles with the contributions from these investments. As mentioned, the company's capital allocation strategy includes returning value to shareholders in the form of increasing dividends and share repurchases.

And Nucor has boosted those returns in the last two years. As the chart below indicates, the company has returned nearly as much capital to shareholders in the last 18 months as it did over the prior decade.

Data source: Nucor. Chart by author.

The share buybacks have decreased the number of common shares outstanding by nearly 20% over the last five years.

NUE Shares Outstanding data by YCharts

And after the 23% boost in the dividend announced in December 2021, Nucor will become a Dividend King this year if it raises its base dividend for the 50th consecutive year in 2022.

Culture matters

Investors should expect that past record to continue. Nucor's growth investments will add to the cash flow for years and decades to come. The C.H.I. transaction also shows that Nucor focuses on culture and how that deal fits.

Nucor uses a pay-for-performance system that also includes a profit-sharing plan for employees. KKR used a similar employee equity ownership philosophy when it owned C.H.I. After Nucor's purchase, all employees at the company were rewarded with cash payouts that averaged $175,000.

That breeds loyalty and Nucor's system will carry that forward. Investors should like that, too, as it comes from the same reasoning that leads to Nucor's capital return to shareholders. The recent volume of investments to grow the business should only enhance that.

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Howard Smith has positions in Nucor and has the following options: short July 2022 $165 calls on Nucor. The Motley Fool has positions in and recommends KKR. The Motley Fool has a disclosure policy.


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