graphic
graphic  
graphic
Personal Finance > Investing
graphic
New blood in the Dow
Could AT&T, Kodak and J.P. Morgan get shown the door?
September 25, 2002: 3:42 PM EDT
By Paul R. La Monica, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Is it time to shake up the Dow?

The venerable average of 30 stocks is trading at a nearly four-year low. But that's not why there is growing suspicion that changes will be made soon. After all, the Dow is not an actively managed mutual fund.

There already has been a substantial amount of turnover in the Dow during the past two decades. Since 1985, fifteen new companies have been added. Market observers say that if changes are made soon, the companies most likely to be removed are AT&T, Eastman Kodak and J.P. Morgan Chase.

The reason a reconfiguration is likely in the near future is that AT&T should complete the merger of its cable division with Comcast by the end of the year. As a result of that deal, the new Ma Bell will be merely a consumer long-distance and business services company with a market value 60 percent lower than its current size.

To be sure, the slimmer AT&T (T: Research, Estimates) still would be a gigantic company. Without cable, it still had sales of more than $42 billion in 2001. And based on current stock prices, AT&T, following the Comcast merger, would have a market value of about $18.8 billion. Five companies in the Dow currently have market values smaller than that. A spokeswoman for Dow Jones said it doesn't comment on speculation about index changes and a spokesman for AT&T would not comment either.

But given the changing nature of telecommunications and the fact that there has been a precipitous decline in AT&T's consumer long-distance revenue over the past few years, it's hard to argue that AT&T is as significant a company in the U.S. economy as it once was.

Welcome to Verizon?

So what could replace AT&T? It's possible that the new AT&T Comcast could take AT&T's place. Based on current prices it would have a market value of about $47 billion. But Jeffrey Hirsch, president of Hirsch Organization, an investment research firm that publishes the Stock Traders Almanac, says he doubts Comcast would be added to the Dow since there probably is no need for a pure play cable company in the average.

Hirsch says Verizon would be a natural replacement for AT&T since the Baby Bells have emerged as the dominant players in telecom. The company has a market value of $78.4 billion and sales of $67.2 billion. That makes it bigger than fellow Baby Bell SBC Communications, which already is in the Dow.

And if AT&T is removed, expect more rejiggering to take place as well. Even though AT&T is the only company currently involved in a major restructuring, individual company transactions prompted larger changes to the Dow in 1997 and 1999.

In 1997, four companies were taken out of the Dow even though only one, Westinghouse, was going through a significant restructuring. (It sold its industrial businesses that year and changed its name to CBS.)

The last time changes were made to the Dow was in 1999 after component Union Carbide was acquired by Dow Chemical. But Union Carbide was not the only company removed. Sears, Chevron and Goodyear also were given the boot and were replaced by Microsoft, Intel, SBC and Home Depot.

What other stocks might get bumped? Chuck Carlson, CEO and portfolio manager of Horizon Investment Services, which publishes the Dow Theory and DRIP Investor newsletters, says that Eastman Kodak's days likely are numbered.

"The Dow is more a barometer of the economy and not so much the stock market. The photography sector isn't all that crucial to the economy," says Carlson. To that end, Kodak (EK: Research, Estimates) is the smallest company in the Dow, with trailing 12-month sales of $12.7 billion and a market value of $7.9 billion. A spokesman for Kodak would not comment.

Changes shouldn't affect performance

J.P. Morgan Chase could be another possible Dow departure. After all, there isn't a huge difference between Dow component Citigroup and J.P. Morgan. Both are financial services components with large consumer banking and investment banking businesses. And J.P. Morgan Chase (JPM: Research, Estimates) has been reeling of late due to concerns about bad loans in its portfolio -- it had significant exposure to Enron, WorldCom and Adelphia, as well as Argentina, for example.

The newest blue chips?
A look at companies that might be considered for membership in the Dow Jones Industrial Average.
Company Market Value ($bill) Sales ($bill)* 
American International Group 141 58 
Anheuser-Busch 43.6 13.2 
Medtronic 50.1 6.7 
Pfizer 173.3 30.5 
Verizon 78.4 67.2 
Walgreen 33.5 27.7 
Wells Fargo 81.5 18.8 
 * For trailing 12 months
 Source:  Multex Investor

Carlson says that if J.P. Morgan were to be taken out, another financial services company probably would replace it. Regional bank Wells Fargo and insurance company American International Group are his top two choices. Wells Fargo's market value is more than twice the size of J.P. Morgan's and American International Group is nearly four times as large as J.P. Morgan. A spokesman for J.P. Morgan would not comment.

Other stocks that Carlson has on a short-list of Dow candidates are medical equipment company Medtronic, Budweiser brewer Anheuser-Busch, drug store chain Walgreen, and pharmaceutical firm Pfizer.

Of course, any changes to the Dow most likely would be made in order to better represent the makeup of the U.S. economy, and not to boost the average's performance. In fact, Tim Hayes, senior equity strategist at Ned Davis Research, says that stocks tend to lag the market after being added to the Dow. That's because stocks that are added typically have done well over an extended period of time (and hence have high valuations) in order to attract the attention of the people who maintain the Dow in the first place.

To that end, the four stocks added to the Dow in 1999 have plunged an average of 50 percent since they joined the Dow. Of course, this period includes the worst bear market in recent history. But ChevronTexaco (the two companies merged after Chevron was taken out of the Dow) has fallen only 17 percent since being removed from the Dow. And Sears actually has surged 58 percent.  Top of page




  More on INVESTING
Danger ahead? Investors turn wary
Finding good advice
Investor confidence continues to slide
  TODAY'S TOP STORIES
7 things to know before the bell
SoftBank and Toyota want driverless cars to change the world
Aston Martin falls 5% in its London IPO




graphic graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.