In an environment where dividend cuts are common, steelmaker Nucor seems to have found a strategy that keeps its payout safe – even despite pre-announcing worse-than-expected earnings. In fact, Tuesday the company announced it was raising its dividend regardless.
How can Nucor get away with this? A couple reasons, actually. For one, tough quarter or not, the company is still profitable. And two, Nucor splits its payouts into a core and a special dividend. While raising the core, or regular dividend, as an expression of “confidence in the future,” Chairman, CEO and President Dan DiMicco told Cramer Wednesday, Nucor suspended the special because earnings no longer warranted it. So even with the core increase, the overall payout is still less than it otherwise would have been.
That special dividend had been based solely on quarterly performance. The idea was to share the wealth with stockholders while business was good.
“But we ran into…a scenario where we all went off the edge of a cliff,” DiMicco said, as customers’ business suffered and credit dried up. As a result, those customers “shut off the order spicket.” Nucor then went from having record first, second and third quarters to a fourth quarter where the company’s running at 50% capacity.
Nucor is “still being profitable,” the CEO said, “but not anywhere near, obviously, where we have been just a quarter earlier.”
At first glance, that may give investors reason to doubt Nucor can defend its regular dividend. Sure the 20 cents per-share special the company paid out is gone, reducing the overall issuance to shareholders to just 35 cents per share per quarter, but shouldn’t we be worried that Nucor cut its capacity in half?
But with President-Elect Barack Obama talking about an infrastructure-based stimulus plan, 2009 could bring better things for Nucor. DiMicco expects there to be “a lot of steel consumed.” Maybe not in the first quarter, but projects should rev up come Q2 and last for 18 months after, he said.
Cramer, and Wall Street, are bullish on NUE. Even with the negative pre-announcement, the stock was up close to 7% Wednesday. And while Cramer had been recommending Nucor anywhere between $28 and $32, he thinks it’s still a buy at $43 with the potential stimulus plan.
“This is the Obama steel play,” he said.
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