How Safe Are the Dividends of These 3 Steel Producers?

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The outlook for steel producers is not very good. With Chinese growth slowing and demand for steel around the world faltering, steel producers are finding it hard to turn a profit. That said, some of these companies actually offer dividend yields greater than 3%, above the market average of around 2%. So, with the outlook for the steel market deteriorating, are the dividend payouts of these companies sustainable?

The contenders

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>P/E</strong></p> </th><th> <p><strong>Dividend yield</strong></p> </th><th> <p><strong>EPS</strong></p> </th><th> <p><strong>DPS</strong></p> </th><th> <p><strong>Payout Ratio</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>United States Steel </strong></p> </td> <td> <p>285</p> </td> <td> <p>1.2%</p> </td> <td> <p>$0.06</p> </td> <td> <p>$0.2</p> </td> <td> <p>131%</p> </td> </tr> <tr> <td> <p><strong>Nucor</strong></p> </td> <td> <p>31.4</p> </td> <td> <p>3.4%</p> </td> <td> <p>$1.4</p> </td> <td> <p>$1.5</p> </td> <td> <p>106%</p> </td> </tr> <tr> <td> <p><strong>Steel Dynamics</strong></p> </td> <td> <p>20.2</p> </td> <td> <p>3%</p> </td> <td> <p>$0.7</p> </td> <td> <p>$0.4</p> </td> <td> <p>54%</p> </td> </tr> </tbody> </table>

Steel Dynamics (NASDAQ: STLD) offers a dividend yield of 3% and a payout ratio of 54% -- the best out of the three steel companies mentioned above. Both Nucor (NYSE: NUE) and United States Steel (NYSE: X) have payout ratios above 100%, indicating at first glance that they cannot afford their dividend payouts.

United States Steel 

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p> Net Operating Cash Flow</p> </td> <td> <p>$404</p> </td> <td> <p>$103</p> </td> <td> <p>$202</p> </td> <td> <p>$200</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$208</p> </td> <td> <p>-$139</p> </td> <td> <p>-$187</p> </td> <td> <p>-$116</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$199</p> </td> <td> <p>-$211</p> </td> <td> <p>-$136</p> </td> <td> <p>-$92</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>$205</p> </td> <td> <p>-$108</p> </td> <td> <p>$66</p> </td> <td> <p>$108</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$7</p> </td> <td> <p>-$8</p> </td> <td> <p>-$7</p> </td> <td> <p>-$7</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>($280)</p> </td> <td> <p>$83</p> </td> <td> <p>($405)</p> </td> <td> <p>$69</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>29</p> </td> <td> <p>0.0</p> </td> <td> <p>9.4</p> </td> <td> <p>15</p> </td> </tr> <tr> <td> <p> Free Cash Flow</p> </td> <td> <p>$189</p> </td> <td> <p>-$44</p> </td> <td> <p>$8</p> </td> <td> <p>$77</p> </td> </tr> </tbody> </table>

*Figures in millions of dollars. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Surprisingly, although its payout ratio is 131%, US Steel has been able to cover its payout with cash available in three out of the four quarters shown above. In addition, despite the economic environment, it would appear that the company is cash generative with a positive free cash flow and is reducing debt.

With a dividend payout averaging $7 million in total per quarter for the company, and operating cash flow above $100 million every quarter, I feel that US Steel's dividend is safe.

Verdict: safe

Nucor 

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p> Net Operating Cash Flow</p> </td> <td> <p>$238</p> </td> <td> <p>$678</p> </td> <td> <p>$75</p> </td> <td> <p>$129</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$216</p> </td> <td> <p>-$230</p> </td> <td> <p>-$334</p> </td> <td> <p>-$331</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>-$174</p> </td> <td> <p>$2</p> </td> <td> <p>$61</p> </td> <td> <p>-$139</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>$64</p> </td> <td> <p>$680</p> </td> <td> <p>$136</p> </td> <td> <p>-$10</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$116</p> </td> <td> <p>-$117</p> </td> <td> <p>-$117</p> </td> <td> <p>-$118</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>($1)</p> </td> <td> <p>$24</p> </td> <td> <p>($651)</p> </td> <td> <p>$12</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>0.6</p> </td> <td> <p>5.8</p> </td> <td> <p>1.2</p> </td> <td> <p>0</p> </td> </tr> <tr> <td> <p> Free Cash Flow</p> </td> <td> <p>-$94</p> </td> <td> <p>$331</p> </td> <td> <p>-$375</p> </td> <td> <p>-$320</p> </td> </tr> </tbody> </table>

*Figures in millions of dollars. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Nucor is not in the same position as US Steel. With a dividend yield of 3.4%, the company has a significantly higher bill for its total dividend payout. Having said that, the company's payout still appears to be relatively well covered in some of the periods shown above.

Thanks to controlled Capex spending, the company has been able to reign in its investing-outgoings and as a result has been able to generate a large amount of cash in certain quarters for financing activities.

However, the company's operating cash flow is erratic and has varied wildly from a high of $678 million to $75 million over the last four quarters, impacting the company's ability to finance the dividend. Based on that, I feel that the payout is unsafe.

Verdict: unsafe

Steel Dynamics 

<table> <thead></thead> <thead> <tr><th> <p><strong>Metric</strong></p> </th><th> <p><strong>Q2 2012</strong></p> </th><th> <p><strong>Q3 2012</strong></p> </th><th> <p><strong>Q4 2012</strong></p> </th><th> <p><strong>Q1 2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Net Operating Cash Flow</p> </td> <td> <p>$101</p> </td> <td> <p>$117</p> </td> <td> <p>$206</p> </td> <td> <p>$30</p> </td> </tr> <tr> <td> <p>Capital Expenditures</p> </td> <td> <p>-$55</p> </td> <td> <p>-$58</p> </td> <td> <p>-$65</p> </td> <td> <p>$45</p> </td> </tr> <tr> <td> <p>Net Investing Cash Flow</p> </td> <td> <p>$1</p> </td> <td> <p>-$48</p> </td> <td> <p>-$97</p> </td> <td> <p>$11</p> </td> </tr> <tr> <td> <p>Cash Available For Financing Activities</p> </td> <td> <p>$102</p> </td> <td> <p>$69</p> </td> <td> <p>$109</p> </td> <td> <p>$41</p> </td> </tr> <tr> <td> <p>Cash Dividends Paid - Total</p> </td> <td> <p>-$22</p> </td> <td> <p>-$22</p> </td> <td> <p>-$22</p> </td> <td> <p>$22</p> </td> </tr> <tr> <td> <p>Issuance/(Reduction) of Debt, Net</p> </td> <td> <p>($22)</p> </td> <td> <p>($199)</p> </td> <td> <p>($7)</p> </td> <td> <p>$98</p> </td> </tr> <tr> <td> <p>Dividend Cover From Cash Available For Financing Activities</p> </td> <td> <p>4.5</p> </td> <td> <p>3.1</p> </td> <td> <p>4.9</p> </td> <td> <p>1.9</p> </td> </tr> <tr> <td> <p>Free Cash Flow</p> </td> <td> <p>$24</p> </td> <td> <p>$37</p> </td> <td> <p>$120</p> </td> <td> <p>$38</p> </td> </tr> </tbody> </table>

*Figures in millions of dollars. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

The last one on the list and with the safest-looking dividend payout in terms of the payout ratio is Steel Dynamics.

It would appear that Steel Dynamics does have the safest dividend on the list . The company has been able to cover its payout with cash available at least one and a half times every quarter for the last year. Indeed, the company has even had cash left over to pay down debt. Additionally, Steel Dynamics has kept Capex spending under control and free cash flow remains positive.

Overall, the dividend payout looks safe even after operating cash flow fell 85% during Q1 of this year.

Verdict: safe

Conclusion

Surprisingly, even though the steel market is coming under pressure right now, the payouts of two out of these three producers appear to be safe and well covered by operating cash flow.

With a safe looking 3% dividend yield, Steel Dynamics could be a good stock for income seekers who are also looking for a play on the global recovery.

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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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