The following companies were added to the Dow Jones Industrial Average November 1: The Home Depot, Inc. (NYSE: HD); Intel Corp. (NASDAQ: INTC); Microsoft Corp. (NASDAQ: MSFT); and SBC Communications Inc. (NYSE: SBC). They replaced Chevron Corp. (NYSE: CHV); Goodyear Tire & Rubber Co. (NYSE: GT); Sears, Roebuck & Co. (NYSE: S); and Union Carbide Corp. (NYSE: UK).
Component stocks in the Dow Jones Industrial Average are selected mostly by two editors of The Wall Street Journal. One, Paul E. Steiger, managing editor of The Wall Street Journal, said, "The changes… make the Dow Jones Industrial Average even more representative of the evolving U.S. economy, as the Average - and the nation - enter a new century."
Arrival of NASDAQ
Intel and Microsoft trade on the Nasdaq stock market. This will be the first time that any DJIA components have not been listed on the New York Stock Exchange since the DJIA was created in 1896, though there were never any restrictions against NASDAQ stocks. The Dow Jones Transportation Average has included Nasdaq stocks since 1991. Some market participants said that Dow Jones was a bit late in adding Nasdaq stocks to the venerable industrial average.
"It is clear that they are behind the times, considering the shift not only in the importance of technology to the overall economy but also in its importance to the stock market in the past few years," said William Meehan, chief market analyst for Cantor Fitzgerald. Microsoft had to wait for inclusion in the industrials until after its market value surpassed that of General Electric Co.
Still, Mr. Meehan said, it is understandable that Dow Jones would want to preserve continuity in its index.
In a CNBC interview on the day the changes were announced, John A. Prestbo, the other selecting editor and also editor of Dow Jones Indexes and markets editor of The Wall Street Journal, said it's not the first time Microsoft - the largest stock in the world - came up in Dow index discussions. "This time it seemed very compelling," he said. "…It's time has come."
In response to a question about AOL's absence from industrials, Prestbo said, "I think AOL is still a little too young to have the track record we're looking for."
Unlike nearly all other stock indexes, changes in the Dow Jones Averages are rare. "Today's changes in the Dow Jones Industrial Average represents a streamlining of its components on a sectoral basis, and are the culmination of a comprehensive review of the 30 stocks we undertook over the last several months," Prestbo said.
Here comes high tech
He said the acquisition of Union Carbide Corp. (UK) by Dow Chemical Co. (DOW) compelled Dow Jones to change the Dow components.
The changes in the Dow industrials reflect the growing importance of technology to the U.S. economy. The arrival of Home Depot this year and of Wal-Mart Stores Inc. in 1997, together with the departure of Sears this year and of the old Woolworth Corp. in 1997, reflects an even broader shift toward newer, higher-technology ways of doing business.
The new companies are far younger than those they replace. Microsoft was founded in 1975, Intel was in 1968, Home Depot in 1978, and SBC Communications in 1984, in the breakup of the old American Telephone & Telegraph Corp.
There goes old tech
Of the companies now being dropped from the 30 stocks, Chevron had been a Dow Jones Industrial Average component since 1930 (as well as from 1924-25), Goodyear also since 1930, Sears since 1924 and Union Carbide since 1928.
In the CNBC interview, Prestbo said people shouldn't assume Home Depot is the direct replacement for Sears. With Wal-Mart Stores Inc. (WMT) as a Dow component, the general merchandise retail category is represented.
"What we didn't have was a specialty retailer, and in Home Depot we have a company that has really made a large impact on America in a specialty retailing line," Prestbo explained.
The shift could have some effect on the performance of the industrial average itself, the nation's most widely quoted market measure. But research by Laszlo Birinyi of Birinyi Associates in Westport, Conn., indicates that the effect might be smaller than many people imagine. If the change had been made at the start of this year instead of now, the industrials would be up 14.94% for the year, compared with their actual gain to date of 12.21%, according to Birinyi.
One possible explanation for the relatively minor difference in performance, Birinyi said, is that the Dow industrials are based on stocks'prices, not on their market capitalization. The seven stocks with the highest raw prices, which reflect 38% of the index's weight, weren't affected by the shift, he noted.
The change in the components will have an impact on the market capitalization of the Dow industrial average - even though the index isn't weighted by market cap - as it will boost the cap by about $1 trillion, to about $3.56 trillion.
Charles Carlson, who co-manages Strong Dow 30 Value Fund, predicted the changes "are going to drive increased interest in the Dow as a viable index alternative to the S&P 500." Over the long term, the Dow Jones Industrial Average and S&P 500 have tracked one another rather closely, but in recent years the S&P 500 has outperformed the industrial average because of its large number of technology issues, fund managers said.
In response to concerns the new additions could inflate an already-bloated Dow Jones Industrial Average, Prestbo said, "People do like some of these stocks because they're more growthy than some of the stocks that are leaving."
When questioned about the possibility of a Microsoft break-up and its impact on the Dow, Prestbo said: "We'll have to take a look at it then. That has happened before, obviously, with AT&T(T), and that's how the Baby Bells came into existence. We'll just have to take a look at whatever the situation is when we know the facts."