United States Steel(NYSE: X) has a storied history, but it is a troubled company today. The problem is multifaceted, but a key issue is the way in which US Steel makes steel. That's the same issue that plagues Cleveland Cliffs(NYSE: CLF). It's also why industry downturns in the cyclical steel industry are usually the best time to buy stronger competitors like Nucor(NYSE: NUE) and Steel Dynamics(NASDAQ: STLD). Here's what you need to know if you have $2,000, or more, to invest today.
The challenge for U.S. Steel and Cleveland Cliffs
U.S. Steel and Cleveland Cliffs both make primary steel, which is a very important thing for the world in general. They make heavy use of blast furnaces, which use metallurgical coal and iron ore to make steel. Blast furnaces tend to be very large and expensive to operate, so they have to be run at high utilization rates to turn a profit.
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When the steel market is strong, U.S. Steel and Cleveland Cliffs can make a lot of money. But when steel prices are weak, they can also lose a lot of money. The steel industry is highly cyclical given steel's importance to the economy, so the profits of this pair of North American steel makers tend to swing back and forth from black to red pretty regularly. That can make them hard to own if you have a long-term investment approach.
Nucor and Steel Dynamics do things differently
Nucor and Steel Dynamics use a more modern method for making steel called electric arc mini-mills. These are, as the name suggests, smaller than blast furnaces, and they use electricity. They also use scrap steel. Electric arc mini-mills are more flexible and can be ramped up and down with demand in a way that blast furnaces can't. That leads to stronger margins through the entire steel cycle. If you think long-term, Nucor and Steel Dynamics are going to be better choices.
The best indication of that, however, isn't going to be found in either company's income statement. It can be found in their dividend histories. Steel Dynamics is a relatively young steel maker, but it has already amassed 14 consecutive annual dividend increases. Nucor is much older, and it has over 50 annual dividend increases behind it, making it a Dividend King.
Steel Dynamics is the growth choice
For investors who prefer growth stocks, Steel Dynamics will be the better option. It's a smaller and younger company than Nucor, so there's simply more opportunity for growth. But the company is also a bit more aggressive than its larger peer in that it is attempting to build an aluminum business.
The technology behind both industries is roughly similar, so this isn't a stretch. But it means that Steel Dynamics has not one, but two potential growth engines. Note that the company's dividend has grown at an impressive 17% annualized rate over the past decade. While the yield is only around 1.5% today, dividend growth investors will likely still find it very attractive.
Nucor is best viewed as a slow and steady industry giant. That's highlighted by the 52 annual dividend increases, with an annual dividend growth rate of around 4% over the past decade. The dividend yield is 1.9% or so today. Conservative investors looking for a steel stock should be looking at Nucor, which has a key goal of producing higher highs and higher lows. To achieve that, it tends to make capital investments in downturns so it comes out the other side a stronger company.
The big reason to be looking at Nucor right now, however, is because its stock has fallen 40% from its 2024 highs. That's not an atypical thing to see in a cyclical industry like steel. It can be hard to buy when everyone else seems to be selling, but historically that's been the best time to step into industry-leading steelmaker Nucor. If you want to own the biggest and the best, Nucor is a buy today in the domestic steel sector.
Nucor and Steel Dynamics are no-brainers
If you're looking at the North American steel industry, there are really only two large steel stocks that stand out. Nucor is the industry giant that conservative long-term investors will probably appreciate most. Steel Dynamics is the still-growing upstart that growth and dividend growth investors will prefer. With the steel industry in a downturn, right now is the time to act.
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