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Dow Jones Shakes Up Its Index With Four Replacements

Markets: Today's booming industries are now better reflected in the famous average.


The nation's best-known stock index got the equivalent of a housecleaning Wednesday, as Dow Jones & Co. said it will make four stock substitutions in its 100-year-old industrial average.

Dow Jones' surprise move will bounce Bethlehem Steel, Texaco, Westinghouse Electric and Woolworth from the 30-stock index, replacing them with health-care giant Johnson & Johnson, technology leader Hewlett-Packard, financial services firm Travelers Group and retailer Wal-Mart Stores.

The substitutions--the first in the Dow since May 1991--continue Dow Jones' policy of the last decade or so to gradually make the venerable index more reflective of the American economy's ongoing shift from smokestack industries to service and technology industries.

The new additions represent "where the market is going and where the economy is going," said Paul Steiger, managing editor of Dow Jones' flagship, the Wall Street Journal, whose editors are the guardians of the Dow.

But as usual when the index is changed, Dow Jones faces intense second-guessing by investment professionals, average investors and anyone with an opinion as to what constitutes a truly representative sampling of the nation's most important businesses--and stocks.

Many Wall Street analysts don't quarrel with Bethlehem Steel's ejection, given the dramatic decline of the steel industry since the 1970s. The addition of Silicon Valley titan Hewlett-Packard to the Dow while Bethlehem bows out after 69 years merely reflects that "information is as important to this society as steel was to past society," said Rao Chalasani, market analyst at Everen Securities in Chicago.

Likewise, some analysts have long criticized Dow Jones for keeping three energy stocks in the Dow (Exxon, Chevron and Texaco) even as the industry's relative importance has declined.

In an ironic twist, however, Westinghouse's decision to shift more into service industries--in particular, the media business, via its ownership of the CBS television network--is what cost it the Dow slot is has held since 1916.

Steiger noted that the Dow already includes two TV networks: General Electric owns NBC and Walt Disney owns ABC.

With the addition of Johnson & Johnson, the Dow gains its second health-care-related stock, joining drug giant Merck. Meanwhile, Wal-Mart will be the second retailer in the index, joining Sears, which has been in since 1928.

The most controversial choice is likely to be Hewlett-Packard. In adding another tech company, why wouldn't Dow Jones have chosen computer chip leader Intel or software king Microsoft? Either also would have given the Dow its first Nasdaq-traded issue; all Dow stocks now are New York Stock Exchange-listed issues.

Steiger said Intel and/or Microsoft "may someday well be in the Dow" but that H-P was favored "because of the diversity of the [tech] businesses they're in."

Yet that also raises the question of whether Dow Jones is making value judgments about the business prospects of the companies in its index. Steiger insisted that the goal is only to have a representative index. "We're not trying to pick winners. We're not producing a portfolio and saying these stocks are likely to go up the most."

Even so, analysts note that it wouldn't serve Dow Jones well to fill the Dow with stocks that wind up being laggards. That could make the index obsolete over time.

And in fact, three of the four stocks being jettisoned have been the Dow's worst performers since the index was last changed in 1991.

Still, Dow Jones has made some memorably bad choices for its index over the years. In 1991, the substitutions of Caterpillar, Walt Disney and J.P. Morgan for truck maker Navistar, steel firm USX and financial services firm Primerica worked out well on balance: Caterpillar and Disney shares have soared since, while Navistar and USX have slid.

Yet Primerica now is being added back to the index, since it turned into Travelers a few years ago. Had Primerica remained in the Dow since 1991, the index would be even higher than it is today: Primerica's 628% gain since then tops any other Dow stock's.

Most famously, Dow Jones kicked IBM from the index in 1939 and didn't add it back until 1979--missing out on 40 years of phenomenal stock performance.

The Dow's latest changes will be effective Monday. As usual with substitutions, Dow Jones will make technical corrections in the way the index is calculated, to assure historical continuity.


New Names for Old Index

Here are the substitutions Dow Jones & Co. will make in the 30-stock Dow Jones industrial average, which has changed stocks relatively infrequently in its 100-year history:


OUT IN Bethlehem Steel Johnson & Johnson (steel) (health care) Westinghouse Travelers Group (media) (financial services) Texaco Hewlett-Packard (energy) (technology) Woolworth Wal-Mart (retailing) (retailing)


Source: Dow Jones & Co.

Dow Leaders Since Last Change

Here are the 30 stocks in the Dow Jones industrial average and their price changes since May 6, 1991--the last time Dow Jones reshuffled the index. Changes reflect any stock splits or corporate spinoffs along the way.


Stock Change Union Carbide +533% Allied Signal +401% Goodyear Tire +373% Coca-Cola +342% Sears +294% United Technologies +241% Caterpillar +224% Procter & Gamble +202% American Express +199% General Electric +188% Eastman Kodak +178% McDonald's +167% DuPont +161% Walt Disney +147% Merck +138% Boeing +128% 3M Co. +116% Alcoa +111% Philip Morris +101% J.P. Morgan +99% Exxon +72% Chevron +70% General Motors +54% Texaco +54% AT&T +44% IBM +40% Intl. Paper +37% Woolworth -27% Westinghouse -32% Bethlehem Steel -40% Dow industrials +139%


Source: Bloomberg News

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