Investors count on the Dow Jones Industrials (^DJI +0.02%) to represent the cream of the crop of America's top companies. But not every Dow component is as strong as its peers, and one company in particular has faced so many challenges lately that many expect the Dow to boot it from the average in the future.
Why Alcoa should be on the chopping block
Alcoa (AA +0.00%) holds a special place in the stock market, as its quarterly report traditionally marks the official beginning of earnings season every three months. Formerly known as the Aluminum Company of America, Alcoa has been part of the Dow since 1959.
But lately, Alcoa hasn't looked much like a stock worthy of being in the Dow. Consider:
- With a market capitalization of just $9 billion, Alcoa is by far the smallest stock in the Dow, at just 2% the size of ExxonMobil.
- Alcoa's share price of just over $8 makes it the least important stock in the average, with its stock making up just 0.42% of the overall average. Dow leader IBM has almost 25 times the influence of Alcoa.
- A couple weeks ago, credit-rating agency Moody's lowered Alcoa's bond rating from Baa3 to Ba1. That's only a single step, but it represents a huge gulf in the bond market, as Alcoa crossed the threshold from investment-grade to junk bond status. Although other rating agencies still have Alcoa's debt rated as investment-grade, Alcoa joins General Motors (GM +0.50%) as the only Dow components in the past 33 years to have a junk bond rating. The Dow removed GM from the average shortly before its bankruptcy in 2009.
Of course, Alcoa isn't alone in suffering from a dismal aluminum market. Both BHP Billiton (BHP +2.63%) and Chinalco (ACH +0.00%) have faced similar challenges in their respective operations, with BHP taking multiple hits on the commodities front due to its exposure in several other difficult metals markets. Rio Tinto (RIO +2.20%) also took a loss for its 2012 year due largely to a massive $14 billion writedown of coal and aluminum assets.
Still, larger companies with broader exposure to commodities might make better choices for the Dow going forward. Aluminum is an important element for industrial production, but copper, steel, and other industrial metals have also been represented in the Dow in the past. Replacing Alcoa with larger broad-based producer of industrial metals might fit better with the Dow's overall status.
Don't expect a quick move
Given Alcoa's half-century history in the Dow, you shouldn't expect quick action from the board that manages the average. Unless Alcoa can bounce back reasonably quickly, however, its days in the Dow appear numbered.
