The Dow Makes Some Changes

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Now here's a personal ad: 107-year-old wealthy, stable industrial average in search of drugs, security, and someone to talk to. Willing to exchange photographs and letters, has someone to talk to now, but would really be happier with somebody else. If interested, please contact the Dow Jones & Co. (NYSE: DJ).

Look at it this way: If the folks at Dow Jones never changed the components that they use to track their widely followed industrial average, we'd still be wondering how original component Laclede Gas did today. Not helpful.

So, for the first time in four years, the Dow Jones Industrial Average is losing some components and gaining some others. Only one of these, in my mind, is a surprise, and that's only because of the company's historical, not current, importance. One week from now, the following companies will be added to the Dow: AIG (NYSE: AIG), Pfizer (NYSE: PFE), and Verizon (NYSE: VZ). Asked to leave the island are AT&T (NYSE: T), International Paper (NYSE: IP), and Eastman Kodak (NYSE: EK).

The one that is a bit of a surprise is AT&T, but given that the company has been broken up now on multiple occasions, it makes sense that the final component of Ma Bell just ain't what she used to be. Besides, now two Baby Bells, Verizon and SBC (NYSE: SBC), are included, so she's actually still quite well-represented.

Why would the Dow Jones make these moves? A simple test is to look at the relative earnings, revenues, and market capitalizations of the incoming and outgoing companies. AT&T, International Paper, and Eastman Kodak are valued at a combined $43.3 billion, while the incoming companies have a market capitalization exceeding $566 billion. Revenues for the incoming were $194.3 billion, compared with $73 billion for the outgoing, and earnings $14.4 billion versus $2.5 billion. We could make all sorts of adjustments, but that's not the point. In the case of whether the incoming companies are more important to the U.S. economy than the outgoing ones, there's just no contest.

The addition of these companies also pushes the Dow Jones into a more globally relevant direction. AIG generates less than 20% of its revenues in the United States, while Pfizer and to a lesser degree Verizon also garner substantial revenues from overseas. It also moves the "industrial" average just a little bit farther away from having much to do with smokestack and foundry kind of companies, again reflecting a shift in the U.S. economy.

But it should be remembered that the committee at Dow Jones is making no statement whatsoever as to the potential for these companies to be superior investments from this day forward. There will be some volatility while indexes shift from the old companies to the new, but that's just noise. No further inference should be taken.

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Bill Mann owns none of the companies mentioned in this story.