The Dow in 2009 As corporate America changes, so must the venerable index. Here are two stocks that should join the club
(MONEY Magazine) – In early April, the powers behind the Dow Jones industrial average booted onetime titans AT&T, Eastman Kodak and International Paper, and added American International Group, Pfizer and Verizon. It was the first change in five years to the closely watched 30-stock index of America's corporate leaders. And that got us to thinking: Which companies might emerge as serious Dow contenders over the next five years?
We looked at some of the biggest companies in industries we think are still underrepresented in the index. Then we ranked them by revenue growth to narrow down the list. Here are two companies we think deserve a spot both in the Dow and in your portfolio--and two current Dow members that we think they'll replace.
ADD: MEDTRONIC (MDT) The aging of America is increasing the demand for cutting-edge medicine. But there are no medical device companies in the Dow. Medtronic, the inventor of the pacemaker, also makes spinal implants for back surgery and a treatment for Parkinson's. A drug-coated stent to keep clogging arteries open is on the way. As a result, this 55-year-old company is still growing sales in the double digits.
ADD: TIME WARNER (TWX) The entertainment business should grow by $122 billion over the next four years, says research firm Economy.com, and Time Warner is the world's biggest media outfit. (It is also MONEY's parent.) As cable, telecom and content converge, no firm is better positioned to become consumers' one-stop shop. The company is already rolling out phone service to its cable subscribers--and it has nearly 11 million of those.
DROP: SBC COMMUNICATIONS (SBC) This Baby Bell is trying to boost its Internet access business, but it faces increasingly stiff competition from the likes of Time Warner. And more than half of its sales still come from providing traditional telephone service, where revenue is shrinking. Sure, Verizon, which was recently added to the Dow, will have to contend with the same problems. But Verizon's operations generated $9 billion more in cash last year than SBC's, giving it the edge during a difficult technological transition.
DROP: BOEING (BA) Scandals in 2003 forced Boeing to fire executives and forfeit government contracts. But the real problems run deeper than bad management. The company has a large defense business at a time when deficits seem likely to cut into military spending for a decade. (Yes, even though there's a war on.) And it's been losing market share to innovative French rival Airbus. Leave it alone. --STEPHEN GANDEL AND JONAH FREEDMAN