Reliance Steel & Aluminum: Attractive Dividend Score Card, Buy (RS)
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Reliance Steel & Aluminum: Attractive Dividend Score Card, Buy (RS)

May 15, 2023

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Reliance Steel & Aluminum Co. (NYSE:RS) has been a stalwart in the metals industry. Today, the company is one of the largest metals service centers in the world, with operations throughout North America and in Asia, Europe, and Australia. It transforms raw metals into usable products such as aluminum alloys, carbon steel, and stainless steel. Reliance is well known for its extensive selection of in-house processed and fabricated metals, including various value-added services such as cutting, grinding, and machining.

Over the past decade, RS has delivered impressive growth for its shareholders, with revenues and earnings per share increasing at a compounded annual growth rate [CAGR] of around 7%. In 2022, the company reported annual revenues of $17.3 billion, up from $14.09 billion compared to the prior year. This growth has been driven by a combination of organic expansion and strategic acquisitions, which have helped the company to expand its product offerings and geographic footprint. With these growth drivers still in play and industrialization expected to grow, especially in developing nations, I am bullish on RS stock.

RS has an impressive financial track record. The company has consistently generated strong revenue growth, with a compounded annual growth rate [CAGR] of about 8% over the last 10 years. In the first quarter of 2023, sales were $3.97 billion, 10% up from Q1 2022.

The company has a favorable profitability profile. The operating margin has steadily grown from 7.65% in 2020 to 14.78% in 2022 FYs. Their gross profit in the first quarter of 2023 was 3.9%, and diligent cost control contributed to pretax income of $508.5 million and diluted earnings per share of $6.43, much above their projections. Due to their excellent working capital management and high profitability, they produced a sizable operating cash flow of $384.6 million in the same quarter.

The company's net income has improved from $369 million to $1840 million from FY 2021 to 2022. In Q1 2023, the company recorded a net profit of $383.1 million, up from about $340 million in Q1 2022. Its return on equity (ROE) is an impressive 25%, even greater than the Metals and Mining industry average of 13%.

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In addition, the company has a strong balance sheet, with a current ratio of 4.8x [MRQ] and a total debt-to-equity ratio of 18.59% [MRQ]. This impressive current ratio shows how secure the company's short-term obligations are and speaks volumes of its short-term solvency. The company has total assets of $10.2 billion, long-term debt of $1.1 billion, and cash and cash equivalents of $1.17 billion. This puts the company in a strong position to continue investing in growth opportunities and return capital to shareholders through its dividend program.

As for the future growth prospects of Reliance Steel, the company should continue to benefit from the secular trends of urbanization, infrastructure development, and industrialization, which are driving global demand for steel and aluminum products. Also, RS is well-positioned for future growth. The company's acquisition strategy has established a strong foothold in the market, and its diversification strategy has allowed it to offer a range of products that cater to a growing number of customers and industries. For instance, its acquisition of Fry Steel should expand the company's product offerings into new markets and industries, including oil and gas, aerospace, and medical devices. I expect RS to maintain its leadership position in the fragmented industry due to economies of scale and supplier leverage from its acquisition strategies.

Strong financial success and a healthy balance sheet position the organization for expansion. RS has sufficient capital to invest in developing new products and services, enhancing existing ones, and expanding into new markets. Potential investors should be encouraged to invest money in the company because of its robust financial position.

Furthermore, the global demand for metals is expected to increase due to the growing urbanization and infrastructure development of emerging markets such as China, India, and Southeast Asia. The aerospace and defense industries are also expected to drive demand for advanced metals and alloys to meet the growing demand for fuel-efficient aircraft, autonomous drones, and other advanced technologies.

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Speaking of dividends, RS has consistently paid a dividend to its shareholders for 27 years and consecutively grown dividends for 12 years, which outclass the industry average, making it a reliable income-producing stock attractive to both income and long-term growth investors.

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The company's current dividend yield is around 1.56%, which is slightly below the S&P 500 average, but the company has a history of increasing its dividend payout over time, which makes it an attractive option for investors looking for both income and capital appreciation. Further, with a payout ratio of 13%, its dividend is highly sustainable and unlikely to succumb to economic adversities in the current challenging economic times. The company's dividend scorecard is excellent, making it a prudent choice for dividend-oriented investors.

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Investing in this corporation is not without its risks. Due to the cyclical and volatile nature of the global metals sector, the company's financial performance may be affected by changes in commodity prices, trade conflicts, and economic downturns. Owing to its extensive network of suppliers and consumers, RS is also susceptible to fluctuations in demand and supply, which increases the likelihood of supply chain disruptions.

Going by relative valuation metrics, RS seems to be trading at a discount. The company is trading at PE and PS [TTM] ratios of 8.56x and 0.87x, respectively, lower than the industry medians of 113.34x and 1.03x. Further, a DCF model by Finbox shows that this company is trading below its fair value. The model output estimates a fair value of $271.49, leaving the company with an upside potential of 13%.


In light of the article's discussion of the company's growth prospects, I think investors should jump at the chance to get on board with this decent growth and dividend payer at a relatively low price.

Despite these risks, however, RS has demonstrated its ability to navigate volatile market conditions and deliver consistent growth over the long term, making it an attractive investment option for investors with a long-term horizon. The company's reliable dividend program, strong balance sheet, and diversified business operations should enable it to continue delivering value to its shareholders for many years to come.

This article was written by

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This article was researched and written by January Mbuvi of Fade The Market.

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