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Could Apple Replace Kraft on the Dow?

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The new owners of the Dow Jones Industrial Average (INDEX: ^DJI  ) -- the index was recently taken over by a joint venture between McGraw-Hill and CME Group -- have a big task ahead of them.

Later this year, Kraft Foods (NYSE: KFT  ) will spin off into two separate companies. One, to be named Mondelez International, will house its global snack business, including brands like Cadbury chocolate and Oreo cookies. The other will retain its grocery business, with brands such as Kraft macaroni and cheese, Philadelphia cream cheese, and Maxwell House coffee.

Because the split will produce markedly smaller companies, however, analysts are speculating whether or not it will retain its membership in the Dow. According to a recent Bloomberg BusinessWeek article: "Kraft, with a $69.8 billion market value that ranks 20th in the 30-stock gauge, may be dropped because the spinoff of its U.S. grocery business will shrink the world's second-largest food company."

Needless to say, if Kraft is removed from the Dow, the big question is: Who will take its place?

Could Apple join the Dow?
At first glance, a highly qualified replacement for Kraft seems to be Apple (Nasdaq: AAPL  ) .

The venerable iPhone and iPad maker is one of the most iconic and successful businesses in America. It's the largest company by market capitalization, out-distancing ExxonMobil by nearly $170 billion. It had so much cash earlier this year that it was actually considered a problem. And its white earbuds are ubiquitous throughout cities around the world.

Despite this, its chances of joining the Dow are slim to none.

The problem?

Its shares are too expensive.

As my colleague David Williamson recently noted, unlike the S&P 500, which is weighted according to market capitalization, the Dow is a price-weighted index. The higher the stock price, the higher the weighting, and vice versa.

Presently, IBM carries the most weight. With a stock price of nearly $183 per share, it accounts for over 11% of the index. And at the other end of the spectrum is Bank of America, which currently trades for $7.50 a share and accounts for only 0.46% of the index.

By one estimate, Apple's almost $600 share price would give the company a 26% weighting on the Dow, effectively defeating the purpose of an index.

A good but unlikely idea
There's no question that the Dow must reinvent itself to stay relevant. Excluding companies like Apple and Google, while at the same time including companies like Hewlett-Packard, Bank of America, and Alcoa, simply doesn't make sense.

Yet, at the same time, given their share prices, adding Apple and Google to the index under its current derivation would effectively transform it into a large-cap technology index.

As a result, my guess is that we're due for a revision of not only the underlying components, but also how they're weighted. Let me know what you think below.

For a list of three dividend stocks every income investor needs, check out our recently released free report: "The 3 Dow Stocks Dividend Investors Need."

Fool contributor John Maxfield owns shares in Bank of America. The Motley Fool owns shares of International Business Machines, Bank of America, ExxonMobil, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Apple and Google. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple and a synthetic long position in International Business Machines. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2012, at 4:31 PM, melegross wrote:

    The DOW is worthless.

  • Report this Comment On July 12, 2012, at 5:51 PM, aufergy wrote:

    Apple could do a stock split and it would fit well in the Dow.

  • Report this Comment On July 12, 2012, at 8:06 PM, lowmaple wrote:

    The experts calculating the DOW could use market cap and a split price formula when prices get too high. Hard to keep relevant either way but we have enough mathematicians too figure out a good formula. Anything better than now.

  • Report this Comment On July 13, 2012, at 5:31 PM, earledouglas wrote:

    The rumors about AAPL joining the DJAI have been floating around for a year. Initially they talked about replacing HPQ, which is having its troubles. AAPL should split about 4:1 or 5:1, which would get the price down to about $120 to $150 (keep it somewhat less than IBM) so that it would not overweight the Dow. With the lower price, together with the announced dividend, AAPL would find a larger community of buyers. Sounds good to me! (Long AAPL and IBM.)

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