Dow Changes on the Horizon

Index adds financial and energy companies

Beginning Feb. 19, 2008, The Dow Jones Industrial Average will open with two new component stocks: Bank of America Corp. and Chevron Corp., which are replacing Altria Group Inc. and Honeywell International Inc. These mark the first changes to the Dow since April 8, 2004.

The restructuring of Altria is what created the opportunity to review all of the stocks in the index. Last year, Altria, formerly Philip Morris Cos., spun off Kraft Foods, and this year it is planning to spin off Philip Morris International Inc. “As a result, the company that is left is substantially different and substantially smaller than the company we’ve had in the Dow [since Oct. of 1985],” says John A. Prestbo, editor and executive director of the Dow Jones Indexes.

In a telephone conference call with Prestbo, reporters questioned why the Dow didn’t add Kraft Foods rather than Chevron. Kraft currently has a market cap of $45 billion. “We did not consider Kraft because we were looking at shortfalls in financials and oil and gas,” Prestbo responded. The Dow only had one company representing the oil and gas industry–ExxonMobil Corp. “We felt that with oil pushing $100 a barrel and its importance in the global economy, we could benefit from having another representative from that industry in the Index,” he explained.

In the financial sector, Bank of America, having grown significantly through acquisitions, was an obvious addition. They hold the No. 2 position in the banking arena for 2007. Honeywell is being dropped because it is the smallest of the industrials in terms of revenue and earnings.

For the sake of continuity, composition changes are intentionally rare,” says Prestbo. As of Sept. 30, 2007, there was $53 billion in assets tied to the 111-year-old, 30-stock index. As of Feb. 8, 2008, the market cap of the added and exiting companies was $358.6 billion and $192.9 billion, respectively. Prestbo says the changes will make a difference but only temporarily.

Honeywell spokesperson Rob Ferris had this to say: “We were surprised by the criteria used in making today’s decision. Since 2003, Honeywell’s sales are up 11% CAGR [Compound Annual Growth Rate] from $23.1 billion to $34.6 billion in 2007, and net income was up 17% CAGR from $1.3 billion to $2.4 billion. We’ve also broadened our portfolio globally through organic growth and acquisitions. Our stock price was up 36% last year, making Honeywell the Dow Jones Industrial Averages’ top performing stock in 2007.”

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