If you are looking for a U.S. steel stock to add to your portfolio, perhaps to take advantage of the government-funded capital spending boom that appears to be ahead for the country, a good starting point is industry heavyweight Nucor(NYSE: NUE). But investors considering Nucor should strongly consider similar but smaller peer Steel Dynamics(NASDAQ: STLD). Here are a few reasons why it could be the no-brainer buy of the two.
1. Faster growth
Nucor is a very big steel company, with a market cap of roughly $43 billion. By comparison, Steel Dynamics is much smaller, with a market cap a touch under $18 billion. Given those metrics, it shouldn't come as much of a surprise that Nucor's revenues are materially larger than Steel Dynamics', as the chart below highlights.
STLD Revenue (Annual) data by YCharts.
But change the way you view this data, and suddenly Steel Dynamics' smaller size becomes a positive. Over the past decade, Nucor's revenues have grown around 117%. Smaller Steel Dynamics has been able to grow its revenues by roughly 200%. That makes Steel Dynamics a much more attractive growth story.
STLD Revenue (Annual) data by YCharts.
There are a number of reasons for the different growth rates, but the most important factor is that growing a big business is harder than growing a smaller one. So a new steel mill added to Nucor's portfolio won't give as much of a boost as a new mill added to Steel Dynamics' portfolio. Given the still-significant size difference between these two companies, growth-oriented investors will likely prefer Steel Dynamics.
2. Dividends
One of the things that set Nucor apart from its peers is its status as a Dividend King, with 50 years of annual dividend increases under its belt. That's a particularly impressive record given the highly cyclical nature of the steel industry, which tends to ebb and flow along with the broader U.S. economy. Steel Dynamics isn't as old of a company, so it simply can't boast of a record like that.
STLD Dividend Per Share (Annual) data by YCharts.
But its dividend has trended steadily higher, just like Nucor's dividend. Steel Dynamics' annual streak of increases, at this point, is up to 13 years. While that's clearly not as impressive in the length department, once again, there's another way to look at this data.
STLD Dividend Per Share (Annual) data by YCharts.
As the chart above shows, Steel Dynamics' dividend has grown 200% over the past decade, while Nucor's dividend has increased a much less-notable 36%. If you are a dividend growth investor, Steel Dynamics looks like the winner again.
3. The "same" foundation
Steel mills are expensive, and Steel Dynamics has been spending to build its business. That has, historically, resulted in a higher amount of leverage for the relatively small mill. For years that meant Nucor was working off of a much stronger financial foundation. But, as the chart below looking at the debt-to-equity ratio highlights, the leverage gap has narrowed materially.
STLD Debt to Equity Ratio data by YCharts.
Yes, Nucor's debt-to-equity ratio of roughly 0.33 times is slightly better than Steel Dynamics' 0.35 times. But the difference at this point is so minor that it is almost irrelevant. Both are financially strong companies. So conservative investors should probably be equally happy with Steel Dynamics or Nucor.
Not quite the same
Nucor and Steel Dynamics share a lot of traits, including the use of electric arc mini-mills, which are more flexible than the blast furnaces that are still an important part of other large U.S. steel companies' operations. But there are some differences to consider, too, including Nucor's more diverse steel footprint and Steel Dynamics' plans to build an aluminum mill, which is looking to add to its business diversification in a vastly different way. But if you are looking at steel companies, Steel Dynamics will likely come out ahead of Nucor where it often counts the most -- growth.
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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.
