EFFECTIVE tomorrow, the Dow Jones Industrial Average will sport four new companies, Microsoft, Intel, Home Depot and SBC Communications, which will replace longtime members Sears, Goodyear Tire & Rubber, Chevron and Union Carbide. While many hailed the change as a better yardstick of a shifting economy, others claimed it was simply a method of pumping up the index by removing companies in decline or in declining industries.
Are Sears, Goodyear, Union Carbide and Chevron, in effect, has-beens? Does getting booted off the nation's premier stock index affect a company's performance and stock price?
Portfolio manager, T. Rowe Price Blue Chip Growth Fund, T. Rowe Price Associates Inc.,
I don't think that it means the companies that have been deleted are not good companies. I think it is an effort by the committee that selects the index to make the index more representative of what has happened in American business. Two of the companies that have been added are very large technology companies. This will make the Dow more in line with technology share in the U.S. economy. It will also make the Dow more consistent with other indices, which are also designed to capture the balance of American business.
I think that it could affect the performance of the deleted companies on a short-term basis. However, on a long-term basis we feel that stock performance is driven by the growth in earnings per share, and from that perspective, companies that are deleted from the index -- or for that matter included in the index -- will ultimately perform in line with their fundamental earnings performance.
Donald E. Bowman
President, Bowman Financial Management Co., Baltimore
I wouldn't say they are has-beens, but they are basically not in the mainstream for what is moving and growing the economy.
You are taking out some old-line companies where they are probably out of the mainstream now of the changing world. The four that they are putting in are all good stocks selling at very high PE [price-to-earning] ratios. That probably will increase the volatility of the Dow Jones.
I don't think going into an index or out of an index should have any impact on profitability. But because there are so many index funds out there trying to copy the performance of the Dow Jones industrial average, those going out will be impacted negatively and those going in should be impacted positively.
Chief market strategist, A.G. Edwards & Son, St. Louis
The change reflects the change in our economy to a technology, service-oriented economy. The companies that are going off are still good companies; they just aren't at the vanguard of where the U.S. economy is growing most dynamically.
What's going on is the Dow now better reflects the current and future outlook for our domestic economy. They're moving out of old-line American companies into the youth of America corporate-wise.
The stocks for the companies going off, after a couple days of confusion, will do whatever they would've done anyway based on the individual outlook for their corporate earnings. It will still be supply and demand for their shares, and it doesn't have anything to do with whether they are in the Dow or not.
Chief market analyst, Cantor Fitzgerald, New York
In the case of Sears it does kind of paint them with that kind of brush with Union Carbide. Union Carbide is simply going to disappear as an entity when they get merged into Dow Chemical.
In the case of Sears, it is much more a slap in the face because they replaced a retailer with another retailer. Then, you have the other two, and it is simply a shift away from commodity producers and heavy industry.
What the Dow Jones folks are doing is increasing the exposure to technology and reducing the exposure to energy and industrials. Underlying the changes was a desire not only to reflect how the economic landscape has changed, but also to have more of a growth orientation.
I think you will see them [the four companies dropped from the index] under a bit of pressure. I don't think it will be too intense, because everybody knows it is coming.
There is an awful lot of money in unit trusts that follow the "dogs of the Dow" strategy. A lot of that money will roll over at the end of the year to start new trusts, and these stocks won't be part of it.
It definitely gives them less visibility, but I don't think it will have a very material affect. IBM was booted out of the Dow once and didn't go out of business. It came back in.