The Dow Jones Industrial Average saw the first changes to its composition since 2004.  Bank of America and Chevron will join the stockmarket index on February 19th, replacing Altria and Honeywell.  The news rekindled the argument that the DJIA is a poor stockmarket barometer, because it is an average of only 30 share prices that ignores the companies' market value. 

Dow 30 Welcomes Two New Members
Dow to Get New Divisors  2/19  SB120337675144775483
BofA, Chevron Added to Dow  2/12  SB120273890267958813
Another Bank in the Dow  2/12  SB120277963961360939

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The boards of Dow Jones and News Corp meet and seal a deal (2007/7/31) after a key Bancroft trust decides to vote for the USD60-a-share offer.  More than a century of Bancroft family ownership of Dow Jones will officially end with a shareholders' vote (12/13) on the USD5.16 billion sale to Rupert Murdoch's News Corp.  People close to the matter said a proxy-vote count showed holders owning more than half the voting power approved the deal.  The deal will extend the reach of News Corp Chairman Rupert Murdoch far beyond his lone U.S. paper, the New York Post, and is likely to send ripples through the media world.
Meet the Editorial Committee 2007/12/14 SB119760252081928841
Murdoch Sets 'Higher Bar' for Dow Jones 12/14 SB119755500310926517
A Deal for Dow Jones: Complete coverage of News Corp.'s USD5 billion offer for Dow Jones, offering a big premium to shareholders at an uncertain time for the newspaper industry and amid consolidation among rivals.
Deal Talks: A Timeline SB119705804516817420
Chronology of the News Corp.-Dow Jones deal, as stated in a News Corp filing Friday (9/07) SB118920208821221002
Read All About It: Dow Jones Deal in Other Papers' Words
Times on China coverage SB117916711923302215



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How The Dow Will Be Different With Its Two New Stocks

By John Prestbo, editor and executive director of Dow Jones Indexes, a unit of Dow Jones & Co.  Bernadette O'Sullivan contributed research to this report.

Two changes in the Dow Jones Industrial Average were announced Monday (2/11). Altria Group Inc. (MO) and Honeywell International Inc. (HON) are out (as of the close Feb. 15), Bank of America Corp. (BAC) and Chevron Corp. (CVX) are in.  I helped make this decision and was on deck early Monday morning to explain our choices - a string of interviews that ran until 3 p.m. EST.  Here are some of the questions I was asked. 

Why now? 

Altria is the midst of a substantial restructuring. It spun off Kraft Foods last year, and has announced its plans to spin off Philip Morris International next month. That left Altria as a much smaller, more narrowly focused company that we didn't think deserved to keep its place in the Dow. As usual, when something happens to a Dow component that requires us to take action we review the remaining 29 as well. When we did so this time, we noticed that Financials and Oil & Gas were a bit underweight relative to the market as a whole (as measured by the Dow Jones Wilshire 5000), and that Industrials were a bit overweight. To fix that situation, we looked at the top companies in those respective industries that weren't in the Dow. At the top were Bank of America and Chevron, both of which met our criteria of being large, well-established companies that are recognized leaders in their lines of business - blue chips, in other words. 

Who are "we"? 

The ultimate responsibility for choosing components for the Dow is that of the managing editor of The Wall Street Journal, Marcus Brauchli. It has been the Journal's top newsman's job since Charles H. Dow created the industrial average. I've been the designated helper since 1991. Marcus invited Ken Brown, deputy Money & Investing editor of the Journal, to participate as well. Ken and I tossed ideas around, but it was Marcus who made the final choice. In that regard, the Dow is a subjectively chosen portfolio of stocks reflecting the managing editor's view of the U.S. market, and by extension the U.S. economy. 

When did you start? 

Late last year, after Altria announced it would propose spinning off Philip Morris International to its board of directors. Those directors ratified the spin-off at the end of January with a March implementation. We waited until the move was official before making these changes. 

Why add a bank when they're all getting creamed? 

We added Bank of America because it was the largest Financials stock not in the Dow, and because Financials were a bit underweight - notwithstanding the current turbulence. Financials have grown significantly over the past decade or so and now constitute about a quarter of the market. An industry of growing importance can't be shirked, in our view. Besides, we aren't stockpickers in the usual sense of the word. We aren't running an investment portfolio; we're attempting to reflect the U.S. market with 30 blue chips. We don't choose components based on what's hot and what's not. Performance, whether of the market or an individual stock, is never a factor per se - although obviously performance affects the relative weights of industries and is part of the reason an individual company becomes a leader. You took Chevron out in 1999 and now you're putting it back in. Wouldn't it have been better just to leave it in? Hindsight is a wonderful thing. Eight or so years ago, oil was around a barrel and we thought a single representative was sufficient for the Oil & Gas industry. Frankly, we wanted that slot for expansion of Technology through the addition of Intel Corp. (INTC) and Microsoft Corp. (MSFT). Since then, things have changed. Because the price of oil has skyrocketed, the prices of oil stocks have gone up and the industry has increased its weight in the market. Once we decided it was important to reflect that increased weight - which we don't think is a temporary phenomenon - Chevron became an attractive choice because it ranks just behind Exxon Mobil Corp. (XOM). 

Why knock out Honeywell? It did very well last year. 

The first thing to be clear about is that our choices absolutely do not constitute an investment opinion on a stock. There is nothing wrong with Honeywell that I know of. But Industrials had gotten a bit overweight in the Dow compared to the overall market. Honeywell was expendable because it is the smallest of the industrial-sector stocks in terms of revenue. Honeywell turned in the best performance last year of any stock in the Dow, rising 36.1%. But as I said before, performance per se isn't a factor in our choices. Our job isn't to make the Dow go up. 

How will the Dow be different after these changes? 

Based on Friday's closing prices, the price-earnings ratio for trailing earnings will drop to 14.93 from 15.48. The PE for projected earnings will fall to 12.80 from 13.48. But the dividend yield will rise to 2.48% from 2.41%. Financials will be heavier, rising to 13.95% on a price-weighted basis from 11.04%. Bank of America will have a weight of 2.83%. To the extent Financials continue to be punished for the subprime mess, the Dow will feel it more than before. The weight of Oil & Gas will almost double, to 10.81% from 5.45% on a price basis. Chevron will have a weight of 5.32%, a bit less than 5.45% for Exxon Mobil. So, the price fluctuations of these companies will count for more in the Dow's performance. The heaviest weight will continue to be International Business Machines (IBM) at 6.93%. 

By John Prestbo; 415-439-6400; AskNewswires@dowjones.com

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