Continuity adds to Dow index's appeal

NEW YORK — NEW YORK -- Perhaps it's time for another revamping of the venerable Dow Jones Industrial Average.

No change has been made in the Dow average -- which will be 100 years old this May -- in almost five years. Given recent history, that's a long time for the Wall Street Journal officials who decide such things.


Changes in the Dow industrials have come about every three years on average since 1976. Before then, changes occurred about every 12.

By contrast, Standard & Poor's Corp. made a record 33 changes in its widely followed S&P; 500 Index last year, and on average made more than 15 changes in each of the past 10 years.


"The landscape of business changes," said Steven Adler, money manager in charge of the $15 million ASM Fund, the only mutual fund that invests exclusively in the 30 stocks in the Dow. "We look to Dow Jones to make those changes and keep it current."

Dow Jones says stocks included must be representative of the broad market and U.S. industry, "major factors in their industries" and widely held by individual and institutional investors.

Measured by size, the runts of the litter today are Woolworth Corp. and Bethlehem Steel Corp., both of whose shares are worth $1.6 billion. By contrast, the average market capitalization of the other 28 stocks in the Dow is $41.2 billion, ranging from $6.0 billion for Union Carbide Corp. to $129.5 billion for General Electric Corp.

As for industrial leadership, Woolworth could easily be replaced by a retailer such as Wal-Mart Stores Inc. (market capitalization: $48.4 billion), or Bethlehem by Nucor Corp. (market capitalization: $4.7 billion).

Still, there are no guarantees that the smallest companies will fall from the list. "Lots of times a company that may not be first on everybody's list as an individual company works quite well as part of a collective whole," said John Prestbo, an editor at the Journal.

Were size alone the most important criterion, semiconductor makers such as Intel Corp., (market capitalization: $47.7 billion) or software publishers like Microsoft Corp. (market capitalization: billion) would be judged prime candidates.

Dow Jones, though, looks for companies with long operating histories and that have weathered several economic cycles. Also, a stock listed on the Nasdaq stock market has never been named to the Dow industrials.

The last change in the Dow industrials came in May 1991, when Walt Disney Co., Caterpillar Inc. and J. P. Morgan & Co. were added, replacing Navistar International Corp., Primerica Corp. and what was then known as USX Corp.


Wall Street Journal editors say choosing the membership of the Dow industrials is more "art than science." There are no formal guidelines for who's in and out.

"It's a very subjective thing," Mr. Prestbo said. Companies in the average "are all old enough and entrenched enough so that they have roots that go deep into the American soil."

"The Dow is a very slow-moving animal," said George Sauter, a Vanguard Group money manager who oversees about $24 billion in assets tied to the S&P; 500. If Journal editors "had their druthers, they would have zero changes over time, as long as the index did not become distorted."

When changes are made, a stock isn't always replaced by another in the same industry.

In 1991, construction-equipment maker Caterpillar Inc. deposed truck manufacturer Navistar International Corp., while money-center bank J. P. Morgan supplanted insurer and stockbroker Primerica Financial Services Corp. Both moves were pretty symmetrical. Then Walt Disney Co. took steelmaker USX's place.

"If there's a company like Navistar was, where it's no longer a big-cap stock, that would justify its removal," said Richard Evans, a Flossmoor, Ill.-based mutual-fund adviser who specializes in monitoring Dow averages. Dow Jones may also decide "that maybe there are some other industries that deserve representation," he said.


To be sure, Dow Jones seldom makes a change in its average -- often regarded as a proxy for all of the U.S. stock market -- unless forced to by a merger or acquisition or spinoff.

Dow Jones editors say they will have to take a look at the new AT&T; Corp., for example, once it splits into a telephone company, a communications equipment maker and a maker of computers and automated teller machines. "That's something I have to study a little bit," Mr. Prestbo said.

"It's so hard to guess what [Dow editors] are doing," Mr. Adler said. Companies in the Dow industrials "treasure" their status, and "don't want to get knocked off," he said.

Even rivals acknowledge the popularity of the Dow industrials. "Its very long history, its continuity adds to its appeal," said Arnold Kaufman, analyst at Standard & Poor's. Viewed over time, "There's not a lot of changes. The people who run the Dow are more concerned with continuity than with a representative average."

For the record, here's how the stocks affected by the last change in the Dow have done since. USX-U.S. Steel shares are ahead 38 percent, Navistar is down 67 percent and Travelers Group Inc., formerly Primerica, is up 366 percent.

Caterpillar has soared 158 percent, J. P. Morgan 57 percent and Disney 112 percent.