Nucor Corp. (NUE) and Caterpillar Inc. (CAT) on Diverging Paths

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

References:
- How Nucor Steel Rewards Performance and Productivity
- Pain, But No Layoffs at Nucor

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