Nucor Forges a Different Path

In a recent article looking at early warning signs of a dividend cut, two companies concerned me over their potential for a future dividend cut: Nucor Corp. (NUE) and Caterpillar Inc. (CAT). The economic downturn lowered demand for the companies products which has resulted in sharply lower earnings. It is interesting to contrast their responses to the slowdown. In short, the actions taken couldn’t have been more different.

CAT’s global machinery sales fell 27 percent in February, the third straight month of declines as the economic downturn eroded demand for heavy equipment. In an effort to align sales and production with plummeting demand, CAT notified an additional 2,454 workers in three states that they were losing their jobs. CAT was already feeling the cash squeeze.

A line worker at NUE’s plant in Darlington, S.C. sent John J. Ferriola, the company’s chief operating officer, a note that simply said “Thank you for caring about me and my family.” NUE’s top management have received hundreds of similar cards and e-mails from their staff of 22,000. If you think this is different and somewhat odd, it is for other companies, but not NUE.

NUE is one of the few remaining steel companies in the U.S. to remain competitive in its industry. It has streamlined and decentralized its management. There are only four layers of management. Senior executives do not have company cars, dining rooms, executive parking spaces or corporate jets. Everyone from the janitors to the CEO has the same basic but generous benefits plan. NUE’s employee relations philosophy is simple and effective:

• Employees should have the opportunity to earn according their productivity.
• If employees do their job well today, they should have a job tomorrow.
• Employees have a right to be treated fairly. The company listens to employees through crew meetings, department meetings, shop dinners and employee surveys.
• Employees must have an avenue of appeal if they believe they have been treated unfairly. This complaint procedure allows employees to carry their complaints to the President of the company.

NUE backs up its philosophy with a unique pay-for-performance compensation system. Employees earn money based on their individual productivity. While employees are paid a lower than industry average hourly rate, they qualify for an exceptional performance bonus if they exceed hourly quotas. Employees see a direct correlation between what they do and their paychecks; a major incentive and a key strength of the program. In fact, this program prompts such high performance that employees were refusing to take time off so the company had to begin forcing them to take time off.

As a result of the downturn, NUE is keeping employees busy rewriting safety manuals, looking for cost savings, and getting ahead on maintenance. Work that used to be done by contractors, such as making special parts, mowing the lawns, and even cleaning the bathrooms, is now handled by NUE staff. Cleaning the bathrooms was an employee suggestion.

You can’t beat the herd by following the herd. For better or worse, NUE has chosen the high-road with its employees. I suspect NUE is equally thoughtful toward its shareholders. Last month I sold CAT, but I am still proud to be a NUE shareholder.

Full Disclosure: Long NUE

Comments

[CM in MA:]

I, too, am long NUE. I've owned shares for more than a decade. As you outlined NUE is a great company, with terrific employees and outstanding management. They are leaders in new steel technology. They use cash wisely. When I listen to their conference calls, I come away believing that the folks running the firm know what they are doing and that they are being straightforward with shareholders and analysts. Compare all this with the financial companies. The difference is stark. Thanks for the article, it's refreshing to see the good in American business get some pixels.

Apr 14 10:23 AM

[TMFSinchiruna:]

I agree.

www.fool.com/investing...

Apr 14 10:32 AM

[drbob66:]

I own quite a bit of NUE as well, for the reasons that you described. I just wish I had bought them a long time ago, as I'm still underwater with them. I also wish the steel business fundamentals were better now, since even at the current price, they look expensive, and it's been annoying to hold onto the shares. I'm glad that they haven't cut the dividend (yet) - at least it shows that they care a little about their long-term shareholders...unlike so many other companies that cut their dividends ( to "conserve cash") and then try to spin it as a good thing for shareholders ("Well, you should be happy that we don't have to declare bankruptcy"). Still, you really have to be an optimist to keep holding NUE stock in this environment, IMO. Analyst earnings estimates for 2009 are now at a fraction of what they were before this "Great Recession," but I do wonder if it's really possible for NUE to make anywhere close to $5/sh in 2010, as some are predicting. Time will tell, I guess.

Apr 14 11:05 AM

[Lightway:]

Also long NUE here, thanks for the article here. Glad to see NUE is trying other methods to deal with the down economy, getting creative and looking for ways to save costs, instead of just cutting heads to make analysts happy.

Apr 14 01:48 PM

[ARNOLDS134:]

i once owned nucor ,when it was nueclercorporastion of america , a 1 to 2 dollar stock ,should have kept itsome people made oodles of cash with it

Apr 14 07:53 PM

[john s. gordon:]

nucor operates minimills supplying structural components to projects in their local geographical areas. given administration focus on infrastructure spending, nucor/s top line should grow,
> jack

Apr 15 08:48 AM

[Margo:]

Here I thought our ideas of how a company should treat it's employees was novel and we've been copying Nucor.

Apr 15 08:58 AM

[BigOlDave:]

Margo,

What co are you with?

Apr 15 08:51 PM

[Lisa Reisman:]

Very interesting analysis. If my understanding serves me, Nucor is mostly non-unionized whereas Caterpillar is still somewhat unionized (I can't find the numbers to support this claim) Not to take anything away from Nucor, they are the Southwest of the steel industry, but they likely have a lot more flexibility in labor relations than Cat does...

Apr 16 06:59 AM

[User 399944:]

Excellent article on NUE, a truly excellent company. I've owned it for ten years and still have a 350% gain, even after its tumble from the $80 level. Top management still has the same "corporate culture" as when its former legendary CEO, Ken Iverson, used to lunch daily at the little deli across the street from his office. That's Nucor's secret of success. Wish other companies would emulate it.

Apr 22 11:42 AM