Three Dow Components Booted Tuesday, But Don't Read Too Much Into The Decision (AA, BAC, HPQ)
In a move described as the largest in nearly a decade, The Wall Street Journal reported Tuesday that Alcoa (NYSE: AA), Hewlett-Packard (NYSE: HPQ), and Bank of America (NYSE: BAC) would be dropped from the Dow Industrials at the close of trading September 20.
The last time this many companies were dropped from (and added to) the Dow was April 2004 when American International Group (NYSE: AIG), Pfizer Inc. (NYSE: PFE), and Verizon Communications Inc. (NYSE: VZ) replaced AT&T Corp. (NYSE: T), Eastman Kodak Co., and International Paper (NYSE: IP).
The most senior member of the departing group, Alcoa, has been a Dow component for 54 years. It will be replaced by Nike. Visa will replace Hewlett-Packard and Goldman Sachs will take over for Bank of America.
Dan Greenhaus, chief global strategist at New York brokerage BTIG said, "It would be very hard to argue that these are three companies not worthy of inclusion. It's a positive development in the sense that you're trying to make the index better with each passing day."
S&P Dow Jones Indices LLC, which oversees the Dow, said in a statement that the changes "were prompted by the low stock price of the three companies slated for removal.” The statement noted that the move also reflected the Index Committee's desire to “diversify the sector and industry group representation of the index."
Although performance has been mixed over the past few months, all three departing companies have underperformed the stock market in recent years.
S&P Dow Jones also said the moves would not affect the level of the index. The Dow is price-weighted while others like the Standard & Poor’s 500 are weighted by components’ market capitalizations.
CNBC made two additional points noting that the Dow Jones industrial average is not actually an industrial average – at least not any more. While historically that was true, as the economy changed the Dow became more representative of the large-cap sector of the stock market as opposed to industrials only. As large-cap stocks change, the Dow changes.
In addition, moves in and out of the Dow are not a judgment about the relative viability of one company over another. The Dow does not intend that these moves provide any sort of investment advice.
As CNBC pointed out, the three companies leaving the Dow are the three lowest priced stocks in the index – plain and simple. The moves are designed to make the Dow more reflective of the large-cap sector it seeks to emulate.
At the time of this writing, Jim Probasco had no position in any mentioned securities.
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