Dow industrials add Bank of America, Chevron

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NEW YORK (CNNMoney.com) -- The Dow Jones industrial average is adding Bank of America and Chevron, replacing Honeywell and Altria.

These changes are the first in the 111-year-old stock index since April 8, 2004, when three of the index's 30 stocks were replaced, according to Dow Jones, which said Monday the moves take effect on Feb. 19.

Honeywell (HON, Fortune 500) is being dropped because it is the smallest of the industrials in terms of revenue and earnings, Dow Jones said in a release. The news comes despite the fact that the manufacturing company yielded the largest return to investors on the Dow last year.

Altria (MO, Fortune 500), formerly Philip Morris Co., has been in the industrial average since Oct. 30, 1985. Last year, the company spun off Kraft Foods Inc. (KFT), and it plans to spin off Philip Morris International next month, making Altria solely a U.S. tobacco company.

"The catalyst for these changes is the restructuring in progress at Altria, which will result in a much smaller and more narrowly focused company," said Marcus W. Brauchli , managing editor of the Dow Jones-owned Wall Street Journal, in a statement.

The Wall Street Journal oversees the makeup of the Dow Jones industrial average, which Charles H. Dow created in May 1896.

Chevron (CVX, Fortune 500) was twice before in the index, once as Standard Oil Co. of California from 1924 to 1925, and then again from 1930 until 1999. The second-largest U.S. oil company recently reported a 29% rise in quarterly profits on the surging price of oil.

"The oil and gas industry's growing importance to the world economy called for another representative to join Exxon Mobil Corp. (XOM, Fortune 500)," said Brauchli.

More bank exposure in a time of crisis

The addition of Bank of America comes at a time when many banks are reeling from bad bets on subprime mortgages.

Last month, Bank of America (BAC, Fortune 500) agreed to a tentative deal to purchase the nation's top mortgage lender Countrywide Financial (CFC, Fortune 500) for $4.1 billion. The companies expect to finalize the deal in the second half of 2008.

"We were underweight with financials," said John Prestbo, editor of the Dow Jones indexes, in a conference call with reporters. "Financials have been a very fast growing market over the past years."

Bank of America joins Citigroup, and J.P. Morgan Chase as the third bank in the average and fifth financial services company overall. Insurer American International Group and credit card firm American Express are the other two.

Prestbo said the Dow tries to serve as a barometer of the stock market by measuring the average value of "leading companies in their respective top U.S. industries" rather than a composite of the most popular or largest stocks.

This is the first change in the composition of the Dow in almost four years. In 2004, the index replaced International Paper, AT&T, and Eastman Kodak with Pfizer, Verizon, and AIG. AT&T is now back in the Dow because SBC Communications bought Ma Bell and kept the AT&T corporate name for the combined company.

Changes probably won't have huge effect

Since World War II, the Dow has typically changed its components once every two or three years.

But the Dow has not always gotten it right. In 1939, the Dow dumped IBM in favor of AT&T. IBM's stock then soared, while AT&T struggled, but IBM did not return to the index until 1979.

"Had it left IBM in, the Dow would have increased dramatically more than it did in the '40s and '50s," said John Steele Gordon, an author and business historian.

To prevent a sudden jump or dive in the index when the changes are made, the divisor used to calculate the index will be changed, Dow Jones said.

But another analyst said that the new changes to the Dow are unlikely to have a major positive or negative impact on the average. And the individual stocks being added and deleted to the Dow probably won't be affected either.

"This will have a very short-term impact on the stocks," said Chuck Carlson, CEO and portfolio manager with Horizon Investment Services.

Carlson noted that as managers of mutual funds indexed to the Dow sell the outgoing companies and buy the new ones, the companies may see an initial bump or drop. However, the change will be temporary since all four companies involved in today's Dow reconfiguration are established firms.