Capital Markets

Shakeup among the Dow Industrials

Three new companies are slated to appear on the index in its first change in over four years. As a whole, The Dow is likely to top 11,000 by the en...
Stephen TaubApril 2, 2004

As of the opening of trading on April 8, 10 percent of the 30 companies included in the Dow Jones Industrial Average will be new ones.

The new companies are insurer American International Group, drug maker Pfizer, and telecom company Verizon Communications. They replace AT&T, Eastman Kodak, and International Paper.

These changes are the first in the 107-year-old stock index since Nov. 1, 1999, when four new stocks turned up in the index.

“None of these changes was triggered by an event such as an imminent merger, which was the case in the past three instances of changes dating back to the early 1990s,” said Paul Steiger, managing editor of The Wall Street Journal. “Rather, they recognize trends within the U.S. stock market, including the continued growth of the financial and health-care sectors and the diminishing relative weight of basic materials stocks.”

Interestingly, Verizon and SBC Communications, which was added in 1999, were two of the seven companies created when AT&T was broken up following an antitrust ruling in 1984.

It is, in fact, the third time descendants have replaced parent companies that had been broken apart, according to Dow Jones. For example, ExxonMobil is a combination of two descendants of Standard Oil (New Jersey), broken up in 1911, while Boeing and United Technologies stem from United Aircraft, which was split in 1934.

This is the second time AT&T was booted from the Dow Jones Industrial Average. It had been a member from 1916 to 1928, reentering in 1939.

Kodak and International Paper depart after lengthy tenures on The Dow. They have been parts of the index since 1930 and 1956, respectively.

The changes won’t cause any disruption in the level of the index, according to Dow Jones assured. The divisor used to calculate The Dow from its components’ prices on their respective home markets will be changed prior to the stock market’s opening on April 8. This procedure prevents any distortion in The Dow’s reflection of the U.S, stock market, according to the news service.

In any event, economists and investment strategists at 30 leading international financial institutions and investment organizations predict that The Dow is likely to top 11,000 by year-end 2004, according to a recent survey by KPMG. The upturn will be driven by moderate economic growth and relatively mild inflation, according to the survey.

Eighty-one percent of the respondents predict The Dow will complete 2004 above 11,000, with 8 percent predicting that the index will climb to 12,840. That compares with its 2003 close of 10,454.