{"id":60916,"date":"2023-09-14T10:51:43","date_gmt":"2023-09-14T14:51:43","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/analyzing-steel-dynamics-dividend-growth-potential\/"},"modified":"2023-09-14T10:51:48","modified_gmt":"2023-09-14T14:51:48","slug":"analyzing-steel-dynamics-dividend-growth-potential","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=60916","title":{"rendered":"Analyzing Steel Dynamics\u2019 Dividend Growth Potential"},"content":{"rendered":"
\n

Recap from July\u2019s Picks<\/strong><\/h3>\n

On a price return basis, the Dividend Growth Stocks Model Portfolio (-3.8%) underperformed the S&P 500 (-2.2%) by 1.6% from July 27, 2023 through August 28, 2023. On a total return basis, the Model Portfolio (-3.6%) underperformed the S&P 500 (-2.2%) by 1.4% over the same time. The best performing stock was up 8%. Overall, 13 out of 27 Dividend Growth stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from July 27, 2023 through August 28, 2023..<\/p>\n

The methodology for this model portfolio mimics an \u201cAll Cap Blend\u201d style with a focus on dividend growth. Selected stocks earn an attractive or very attractive rating, generate positive free cash flow (FCF) and economic earnings, offer a current dividend yield >1%, and have a 5+ year track record of consecutive dividend growth. This model portfolio is designed for investors who are more focused on long-term capital appreciation than current income, but still appreciate the power of dividends, especially growing dividends.<\/p>\n

Featured Stock for August: Steel Dynamics
\n
\n STLD
\n <\/fbs-ticker> <\/strong><\/h3>\n

Steel Dynamics (STLD) is the featured stock in August\u2019s Dividend Growth Stocks Model Portfolio. I first made Steel Dynamics a Long Idea in June 2023.<\/p>\n

Steel Dynamics has grown revenue by 10% compounded annually and net operating profit after tax (NOPAT) by 26% compounded annually since 2012. The company\u2019s NOPAT margin increased from 4% in 2012 to 15% over the TTM, while invested capital turns rose from 1.4 to 2.7 over the same time. Higher invested capital turns and NOPAT margins drive return on invested capital (ROIC) from 5% in 2012 to 26% in TTM.<\/p>\n

<\/fbs-ad><\/p>\n

Figure 1: Steel Dynamic\u2019s Revenue & NOPAT Since 2012<\/strong><\/p>\n

Free Cash Flow Supports Regular Dividend Payments<\/strong><\/h3>\n

Steel Dynamics has increased its regular dividend from $0.19\/share in 1Q18 to $0.43\/share in 3Q23. The current quarterly dividend, when annualized, equals $1.72\/share and provides a 1.6% dividend yield.<\/p>\n

More importantly, Steel Dynamics\u2019 free cash flow (FCF) easily exceeds its regular dividend payments. From 2018 through 2Q23, Steel Dynamics generated $5.4 billion (27% of current enterprise value) in FCF while paying $1.2 billion in dividends. See Figure 2.<\/p>\n

Figure 2: Steel Dynamics\u2019<\/strong> FCF vs. Regular Dividends Since 2018<\/strong><\/p>\n

Companies with FCF well above dividend payments provide higher-quality dividend growth opportunities. On the other hand, dividends that exceed FCF cannot be trusted to grow or even be maintained.<\/p>\n

STLD Is Undervalued<\/strong><\/h3>\n

At its current price of $106\/share, Steel Dynamics has a price-to-economic book value (PEBV) ratio of 0.5. This ratio means the market expects Steel Dynamics\u2019 NOPAT to permanently fall 50% from current levels. This expectation seems overly pessimistic given that Steel Dynamics has grown NOPAT by 26% compounded annually since 2012 and 20% compounded annually since 1998.<\/p>\n

Even if Steel Dynamics\u2019 NOPAT margin falls to 11% (average since 2016), and revenue falls by % compounded annually through 2032, the stock would be worth $135\/share today \u2013 a 27% upside. See the math behind this reverse DCF scenario. In this scenario, Steel Dynamics\u2019 NOPAT would decline 5% compounded annually through 2032. Should the company\u2019s NOPAT grow more in line with historical growth rates, the stock has even more upside.<\/p>\n

Add in Steel Dynamics\u2019 1.6% dividend yield and a history of dividend growth, and it\u2019s clear why this stock is in August\u2019s Dividend Growth Stocks Model Portfolio.<\/p>\n

Critical Details Found in Financial Filings by My Firm\u2019s Robo-Analyst Technology<\/strong><\/p>\n

Below are specifics on the adjustments I make based on Robo-Analyst findings in Steel Dynamics\u2019 10-K and 10-Qs:<\/p>\n

Income Statement: I made $146 million in adjustments with a net effect of removing $104 million in non-operating expenses (1% of revenue).<\/p>\n

Balance Sheet: I made $2.2 billion in adjustments to calculate invested capital with a net decrease of $1.0 billion. The most notable adjustment was $534 million (4% of reported net assets) in asset write-downs.<\/p>\n

Valuation: I made $4.8 billion in adjustments, with a net decrease in shareholder value of $2.6 billion. The most notable adjustment to shareholder value was $2.8 billion in total debt. This adjustment represents 16% of Steel Dynamics\u2019 market value.<\/p>\n

Disclosure: David Trainer, Kyle Guske II, Italo Mendon\u00e7a, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Recap from July\u2019s Picks On a price return basis, the Dividend Growth Stocks Model Portfolio (-3.8%) underperformed the S&P 500 (-2.2%) by 1.6% from July 27, 2023 through August 28, 2023. On a total return basis, the Model Portfolio (-3.6%) underperformed the S&P 500 (-2.2%) by 1.4% over the same time. The best performing stock […]<\/p>\n","protected":false},"author":1,"featured_media":33823,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-60916","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\nAnalyzing Steel Dynamics\u2019 Dividend Growth Potential | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Recap from July\u2019s Picks On a price return basis, the Dividend Growth Stocks Model Portfolio (-3.8%) underperformed the S&P 500 (-2.2%) by 1.6% from\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=60916\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta 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