GO TO> DJIA HISTORICAL CHART
Another
Makeover
for the Dow
by Barry S. Arnold, editor
The Primary Trend
The venerable Dow Jones Industrial Average (DJIA) has just been given its final facelift for the 20th Century. In an effort to prepare the popular stock market barometer for its journey into the New Millennium, editors of The Wall Street Journal (published by Dow Jones & company) have decided that the component stocks of the Dow 30 need to more fully reflect the "new" U.S. economy, and as such, have effected a 4-for-4 switch as of November 1st:
Out
with the Old
Chevron (energy)
Goodyear Tire (consumer durables)
Sears (retail)
Union Carbide (chemicals)
In
with the New
SBC Communications (telecommunications)
Intel (technology)
Home Depot (retail)
Microsoft (technology)
Due to its
role as the most popular of the market benchmarks and its select
list of members, changes in the DJIA always make headlines. On
the opposite page, we detail the family lineage of the Dow 30
since its inception on October 1, 1928. (While the DJIA is actually
103-years old, its graduation from a 20-stock to the present
day 30-stock average was made on 10/1/28.)
We list several noteworthy observations regarding
the Dow's recent transformation:
1. This is the first change since four stocks were replaced on March 17, 1997:
- In: Hewlett-Packard, Johnson & Johnson, Travelers (now Citigroup), Wal-Mart
- Out: Bethlehem Steel, Texaco, Westinghouse (now CBS), Woolworth (now Venator).
2. Coupled with the stock swaps in 1997, this is the greatest number of changes (8) in a three-year period since 1932-34 when 11 new faces joined the elite Dow 30.
3. For the very first time, two Nasdaq stocks (Intel and Microsoft) are joining what was traditionally a New York Stock Exchange exclusive club.
4. Both Sears and Union Carbide were original members of the Dow 30. With their exit, this leaves only General Electric and General Motors as the last of the original 1928 cast.
5. While Union Carbide's replacement was inevitable (due to its takeover by Dow Chemical), the other three swaps were definite "technological" enhancementsa move to usher in the "new era" and dismiss the "industrial old".
6. The Dow divisor increases negligibly to 0.204, which means that for every $1 move in one of the 30 Dow components, the DJIA will increase/decrease by 5 points. This divisor, which obviously started out at 30 in 1928, has been adjusted downward due to stock splits, spin-offs, and component changes (such as the most recent swaps) in order to prevent any abrupt fluctuations in the DJIA's calculation. Being under 1.00, this "divisor" actually acts as a multiplier.
7. Once again, The Wall Street Journal editors' foresight in 1997 proved correct. The stocks that were evicted in 1997 (Bethlehem Steel, Texaco, Westinghouse and Woolworth) only gained $22 in aggregate, or 110 DJIA points based on today's divisor of 0.204. However, the four new members (Hewlett-Packard, Johnson & Johnson, Travelers and Wal-Mart) gained a total of $131 since March 17, 1997, or equivalent to 655 DJIA points.
8. The four new changes will boost the market cap of the DJIA by about $1 trillion to $3.6 trillion.
Some market
observers applaud the inclusion of Microsoft and Intel in the
DJIA (and we agree that those two companies are deservingespecially
since Microsoft is the largest public company with a market cap
approaching $500 billion). However, this new facelift also adds
a modicum of expensiveness to the Dow since the four new stocks
carry much higher P/Es than the four exiting components. We can
all agree that the newcomers are great companies. But are they
great stocks? We'll have to stay tuned, but The Wall Street
Journal editors have had fairly clear crystal balls in the
past.
See the "Dow Jones Industrial Average
(A History Lesson)" on the opposite page.
Editor's Note: Barry S. Arnold is editor of The Primary Trend, published by Arnold Investment Counsel Inc., 700 North Water St., Milwaukee, WI 53202, 1 year, 12 issues, $80. In addition to publishing The Primary Trend, Arnold Investment Counsel Inc. provides investment counseling/portfolio management services to clients and to The Primary Trend family of no-load mutual funds. For more information call (414) 271-2726.
