Dow Jones chops three from index to reflect changing times
Alcoa, Bank of America and Hewlett-Packard - three stalwarts of corporate America that have fallen out of favour lately with investors - will be removed from the Dow, to be replaced by Goldman Sachs, Visa and Nike.
The change, which will go into effect after the close of trading on September 20, is the largest revision to the index since April 2004, when AT&T, Eastman Kodak and International Paper were dropped. It reflects the changing landscape on Wall Street and in the broader US economy.
The decision to remove the three companies was prompted by their sagging stock prices and the index committee's desire to diversify the mix of companies represented, S&P Dow Jones Indices, the company that operates the index, said. It would not affect the level of the index because the underlying calculation will be adjusted.
With 30 blue-chip companies as its members, the Dow index is closely watched as a barometer of the broader market. It has recovered strongly since the turmoil of the financial crisis and is up about 15 per cent this year.
In contrast to the Standard & Poor's 500 stock index, the Dow is calculated as a price-weighted index, so the stocks with the highest share price have the greatest weight. The three stocks that are being removed are priced in the single or low double-digit range, putting them on the lower end of stocks in the index.
"They've dropped the smaller weights out of the index and replaced them with what they deem to be better candidates representing the way the economy is moving," said Trista Rose, the global head of index strategy at UBS. "I wouldn't say that it would have a noticeable impact on trading volume."
For Alcoa, its exclusion is a symbolic comedown. The aluminium company, which joined the index in 1959, has traditionally kicked off earnings season. In recent years, the company has had to contend with a global slump in demand.
"The composition of the Dow Jones industrial average has no impact on Alcoa's ability to successfully execute our strategy," Alcoa said on Tuesday. "We are focused on the things we can control."
Bank of America and HP, more recent entrants to the Dow, are also confronting challenges.
The bank, whose entry into the Dow was announced in November 2008, has been working to shrink its business. It has faced an array of legal issues, many stemming from its acquisition of the subprime lender Countrywide Financial in 2008.
While its stock is still trading well below its pre-crisis level, it has experienced gains in recent months after doubling last year.
It said the strong performance of its stock compared with the other companies in the index.
"This decision has no impact on our business or our strategy for providing solid returns to shareholders," it said.
HP was only the second computer company in the Dow when it was added in 1997, coming after IBM. Now, it is fighting to turn around its business. In an example of its continuing woes, the company last year took a 79 per cent write-down on its disastrous acquisition of the British software company Autonomy. "We are making progress in our turnaround," it said. "We are already seeing significant improvement."
Changes in the Dow have less trading significance than changes in larger indexes, such as the S&P 500 or the Russell 2000, which are tracked by a range of investment products. Still, the Dow, the nation's oldest index, continues to have symbolic heft.
The new entrants are seen as having relatively bright futures. Goldman has survived the financial crisis in better shape than its rivals. Its profit doubled in the second quarter.
Visa, the San Francisco-based payments giant, has enjoyed a buoyant stock price, up about 3.4 per cent on Tuesday. Goldman rose more than 3.5 per cent.
Frequently Asked Questions about this Article…
The Dow is removing Alcoa, Bank of America and Hewlett‑Packard and replacing them with Goldman Sachs, Visa and Nike. The swap takes effect after the close of trading on September 20 and is the largest revision to the index since April 2004.
S&P Dow Jones Indices said the removals were prompted by sagging stock prices and a desire to diversify the mix of companies in the Dow. The index committee also tended to drop smaller price‑weighted weights — the three being removed trade in the single or low double‑digit price range.
The index level itself will not be affected because the Dow’s underlying calculation will be adjusted to account for the swaps. The article notes the change is largely symbolic and is not expected to have a noticeable impact on overall trading volume.
Being price‑weighted means stocks with higher share prices carry greater influence on the Dow’s value. Because the three removed stocks were priced in the single or low double‑digit range, they represented smaller weights and were candidates for replacement by higher‑priced names.
The index committee and market observers see those companies as better representing how the economy is moving and as having relatively bright futures. The article notes Goldman survived the financial crisis in relatively strong shape (profit doubled in the second quarter) and Visa had a buoyant stock price at the time of the change.
The removals are described as symbolic rather than a judgment on each company’s ability to operate. Alcoa said the change doesn’t affect its strategy, Bank of America said it won’t impact its business or shareholder returns, and HP said it is making progress in its turnaround after taking a large write‑down on its Autonomy acquisition.
Changes to the Dow tend to have less trading significance than changes to broader indexes such as the S&P 500 or the Russell 2000, which are tracked by a wider range of investment products. Still, the Dow remains a closely watched, symbolic barometer of the market.
The swap goes into effect after the close of trading on September 20. At the time of the announcement, Visa’s stock was reported up about 3.4% and Goldman rose more than 3.5%.
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