Pennsylvania Investment Observer

Changes for the Dow

by Judy Loy

David Bowie sang, "Ch, Ch, Changes..." and we can sing it on Thursday, April 8, 2004, when the Dow Jones Industrial Average (DJIA) alters its components. Last Thursday, April 1st, the Dow Jones & Co., Inc. announced changes in the companies followed by their benchmark, the Dow Jones Index. The changes are as follows: AT & T Corp. (T), Eastman Kodak (EK), and International Paper Co. (IP) are being replaced by American International Group Inc. (AIG), an insurance company, Pfizer (PFE), a pharmaceutical company, and Verizon (VZ), a telecomm company. In an interesting twist, Verizon was among the seven companies spun-off from AT & T in 1984 due to an antitrust ruling. The editors of The Wall Street Journal, which is published by Dow Jones & Co., decide the composition of the Dow Index. According to Paul E. Steiger, managing editor of The Wall Street Journal, the changes "recognize trends within the U.S. stock market, including the continued growth of the financial and health care sectors and the diminishing relative weight of basic materials stocks." The last change to the Dow was in November 1999. Microsoft (MSFT), Intel Corporation (INTC), SBC Communications (SBC), and Home Depot (HD) replaced Chevron Corporation (now ChevronTexaco), Goodyear Tire & Rubber Company (GT), Union Carbide Corporation, and Sears (S). Dow Jones & Co. states that company additions and deletions from the DJIA do not in any way reflect an opinion on the investment merits of the company. However, in my opinion, the businesses run by AT & T and Eastman Kodak are heading the way of the dinosaur unless they change rather quickly.

Charles Henry Dow, cofounder of Dow Jones & Co, created the Dow Jones Industrial Average on May 26, 1896. On that date, the Average consisted of 12 companies, American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal & Iron, U.S. Leather pfd, and U.S. Rubber. Only two corporations still exist from the original average in this day and age, General Electric (GE) and Laclede Gas (LG), and only GE still shows up in the Dow. However, GE hasn’t been in the Average during the entire period, it was removed and reinstated twice during the 107 years. The Dow expanded to its current coverage of 30 stocks on October 1, 1928. A divisor was introduced at this time to adjust for the effect of stock splits, stock distributions, and stock substitutions.

The current DJIA consists of 30 Blue Chip stocks in industries ranging from energy, financial, to technology. The Dow differs from the popular Standard & Poor’s 500 Index and other indices, because it is not weighted for market capitalization. Therefore, higher priced stocks have a greater impact than lower priced stocks in the DJIA. More information, including all 30 stocks in the index, is available on the web site of Dow Jones Indexes, http://www.djindexes.com. It includes an interesting PDF file on all changes to the Dow in its history and the other, less followed indexes of the Dow Jones Averages, which are the Dow Jones Utilities Average, the Dow Jones Composite Average, and the Dow Jones Transportation Average.

As our economy continues to shift, further changes in the Dow Jones Industrial Average will be needed, but continuing to make the necessary changes is a way to keep the Dow relevant in an ever-changing environment.

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