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Say goodbye to AT&T and Kodak
They are finally leaving the Dow. Verizon is one of the replacements but other techs are worthy too.
April 1, 2004: 12:52 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

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This is an update of a column that originally appeared on November 6, 2003

NEW YORK (CNN/Money) -- The folks at Dow Jones finally came to their senses and kicked out Eastman Kodak and AT&T from the Dow Jones Industrial Average. International Paper also got the boot.

It's about time. In addition to the original version of this column in November, we also wrote in September 2002 about how the Dow needed some new blood.

In that story, we came up with a list of seven companies that could be top contenders. And what do you know? Three of them, Verizon, American International Group and Pfizer were chosen to replace AT&T, Kodak and IP.

Giving Ma Bell and Kodak the old heave-ho really makes a lot of sense. Neither is the best example of a leader in a key economic sector, which is what the Dow is supposed to represent.

AT&T has no wireless business. It is essentially a long-distance and local phone company whose best days are behind it. Sales are on the decline. So are earnings. It's been a nice run, but Ma Bell needed to go.

Kodak's continued inclusion in the Dow was even more preposterous. At least AT&T (T: Research, Estimates) still has some heft, with a market value of nearly $15.5 billion and expected sales in 2004 of $31 billion.

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Kodak (EK: Research, Estimates)? It's a mid-cap stock, worth just $7.5 billion with estimated revenue of $13.6 billion -- not a lot by Dow 30 standards.

Twelve of the Dow components have 2004 revenue targets exceeding $50 billion.

Also troubling is that Kodak decided last year to slash its dividend to pay for a new growth strategy focusing on digital imaging (a move that many on Wall Street think is several years too late).

How can a company be a leader if it requires a massive makeover to merely catch up with the latest technology trends? (For more about Kodak's dividend cut and increased push into digital photography, read "Not a pretty picture".)

The last time the editors at the Wall Street Journal shook up the Dow was more than four years ago. That's when Microsoft and Intel became the first Nasdaq-listed companies to join the exclusive club. SBC Communications and Home Depot were also added.

Sears, Goodyear, Union Carbide and ChevronTexaco were given the boot.

Welcome to Verizon

It's interesting to note that only one tech-related company was chosen as one of the new three Dow constituents. There will probably be some debate about why Verizon was chosen since fellow Baby Bell SBC Communications is already in the Dow.

But that argument is a little weak. Verizon (VZ: Research, Estimates) is the biggest Baby Bell. It is the majority owner of Verizon Wireless, the nation's largest cell phone company. Telecom is still an important industry. And after all, who said you have to have only one company in a sector?

Knocking on Dow's door?
These tech companies could also find their way into the Dow some day.
CompanyMarket Value*Est. 2004 sales
Cisco Systems$164 billion$21.8 billion
Comcast$65 billion$20 billion
Dell$86 billion$48.4 billion
* as of 4/1/04

Merck and Johnson & Johnson are both drug companies but that didn't stop the WSJ editors from adding Pfizer. And how different really are Citigroup and J.P. Morgan Chase?

Still, there are plenty of worthy candidates from tech and telecom that could be future Dow contenders.

How about Cisco Systems (CSCO: Research, Estimates)? It is the leader in networking equipment, a crucial part of technology not represented in the Dow.

Or maybe Comcast? Ma Bell sold its cable business to Comcast (CMCSA: Research, Estimates) in 2002 and the resulting company is now the largest U.S. cable firm, with expected sales next year of $20 billion and a market value of $65.4 billion. It's hard to dispute the growing importance of cable, especially since cable and telecom companies are looking more and more alike these days.

Of course, Comcast could buy its way has made an unsolicited takeover bid for Walt Disney (DIS: Research, Estimates).

Eastman Kodak Company
AT & T Corporation

Finally, you can't count out Dell. Sure, Dell (DELL: Research, Estimates) and Dow member Hewlett-Packard are in similar businesses. But if the Dow is supposed to include industry leaders then how can Dell be excluded?

At last check, H-P made the majority of its money from printers and is still struggling to eke out a profit in its PC and enterprise hardware businesses, stuff like servers and storage.

And how about Amazon in the S&P 500?

But enough about the Dow.

On to a quick (I promise) rant about another key market barometer -- the S&P 500. True, the people at Standard & Poor's have done a better job of including key tech companies in the index. But there are still some notable omissions.

I think the most glaring is (AMZN: Research, Estimates), which is finally making money and is expected to report $6.7 billion in sales this year.

That's more than analysts are expecting from several techs in the S&P 500, such as Qualcomm, Analog Devices and Electronic Arts. It's also more revenue than a bunch of S&P 500 retailers are expected to post this year, including RadioShack, Bed Bath & Beyond and Tiffany.

Amazon has survived the meltdown and deserves to be included in the S&P 500 with the likes of fellow Nets Yahoo! and eBay. It's as simple as that.

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