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The Dow Jumps the Gun

http://www.fool.com/investing/general/2013/05/26/the-dow-jumps-the-gun.aspx

Alex Planes
May 26, 2013

On this day in economic and business history ...

Exactly 36 years after it was created, the Dow Jones Industrial Average (INDEX: ^DJI) made a number of great changes -- or changes that would have been great, if the Dow's overseers had stuck to their guns. On May 26, 1932, seven new stocks joined the Dow. Only one has remained part of the index ever since: Procter & Gamble (NYSE: PG). Two others -- Coca-Cola (NYSE: KO) and IBM (NYSE: IBM) -- were removed far too soon.

Procter & Gamble had an eventful 1932 after joining the Dow. Its soap-making plants shifted to a five-day workweek, founding scion James Norris Gamble passed away at the ripe old age of 95, and it won an award for workplace safety in New York. However, the lowest ebb of the early Great Depression eviscerated P&G's profits, which shrank to a mere $9.1 million in fiscal 1932 from $22.7 million the year before. The company ably recovered from these doldrums, and over the following eight decades its bottom line swelled to $10.76 billion, representing an annualized net income growth rate of 9.3%. The Dow, by comparison, grew at 7.2% per year from the day of P&G's initiation to its 80-year anniversary.

Coke was coming off the first year of its wildly successful Santa Claus ad campaign in 1932, and despite the recession, shareholders had enjoyed gains of roughly 1,000% since the company's IPO in 1919. Coke was gone from the Dow by 1935 and wouldn't rejoin until 1987. This meant that the Dow missed out on a truly remarkable run of returns -- had Coke remained with the index for the same uninterrupted 80-year period as P&G, it would have contributed a seven-digit (2,100,000%) total return to the Dow's growth.

But Coke's stock, which has often split on reaching a triple-digit share price, might have had, at best, a similarly outsized impact as a consistently triple-digit IBM stock on the price-weighted Dow. IBM was removed from the Dow in 1939 and wasn't readded until 1979, which meant that the index missed out on the company's incredible (and incredibly profitable) technological progress from analog tabulators to digital mainframes. Even in 1939, IBM's future seemed bright enough to justify continued placement, as it was then responsible for providing calculating machines for the recently formed Social Security Administration.

Between the 1950s and 1979, IBM introduce