Capital Markets

How Can the Dow Change and Not Rise or Fall?

By making its first switch of components in four years, adding B of A and Chevron and axing Altria and Honeywell.
Stephen TaubFebruary 11, 2008

It is hardly an average day for the Dow Jones Industrial Average.

For the first time in nearly four years, the News Corp.-owned Dow Jones & Co. said it would change components in the 30-member Dow Jones Industrial Average on Feb. 19, installing Bank of America Corp. and Chevron Corp., and removing Altria and Honeywell.

The addition of the financial services giant and the energy behemoth are the first changes for the widely used 111-year-old stock index since April 8, 2004. Then, three of the 30 industrial stocks were replaced. Since then, the DJIA has become the property of News Corp.

“The catalyst for these changes is the restructuring in progress at Altria, which will result in a much smaller and more narrowly focused company,” said Marcus W. Brauchli, managing editor of The Wall Street Journal, which oversees the makeup of the Dow. “We saw that the financials industry was under-represented — notwithstanding the current turbulence — and that the oil and gas industry’s growing importance to the world economy called for another representative to join ExxonMobil Corp.”

Altria, formerly Philip Morris Cos., has been in the industrial average since Oct. 30, 1985. It adopted its current name in 2003. Last year it spun off Kraft Foods Inc. It recently announced the spin-off next month of Philip Morris International Inc., which will leave it as a purely domestic tobacco company.

Honeywell is being dropped because it is the smallest of the industrials in terms of revenue and earnings, Dow Jones noted. “Additionally, the role of industrial companies relative to the overall stock market has been shrinking in recent years,” Brauchli said.

AlliedSignal acquired Honeywell in late 1999 and adopted that name for the new entity. The predecessor of AlliedSignal was Allied Chemical & Dye Corp., formed in 1920 and added to The Dow on Dec. 7, 1925.

Chevron has been in the industrial average twice before. The first time, as Standard Oil Co. of California, was from February 1924 to August 1925. The company re-joined The Dow in 1930, but was replaced on Nov. 1, 1999. The Chevron name was adopted in 1984.

Of course, the changes won’t cause any disruption in the level of the index. The divisor used to calculate The Dow from its components’ prices on their respective home exchanges will be changed prior to the opening on Feb. 19. This procedure prevents any distortion in The Dow’s reflection of the U.S. stock market.

At about the time the change was announced, by the way, the DJIA was having another off day, at 12120.52, down 61.61.