Posted on: Friday, April 2, 2004

Dow stirs index with refreshed stock list

By Thomas S. Mulligan
Los Angeles Times

NEW YORK — The Dow has hung up on Ma Bell.

Acknowledging changes in the U.S. economy and the stock market, Dow Jones & Co. yesterday said it would replace AT&T Corp. and two other long-time members of its blue-chip industrial average with three much bigger and faster-growing companies.

AT&T, Eastman Kodak Co. and International Paper Co. will give way to insurer American International Group Inc., drug giant Pfizer Inc., and "Baby Bell" Verizon Communications Inc. in the 30-stock index beginning Thursday, Dow Jones said.

The move — the first reshuffling of the best-known U.S. market barometer since Nov. 1, 1999 — "is a recognition of the growth of finance and health care" in the economy, said John Prestbo, editor of Dow Jones Indexes.

The newcomers dwarf the companies they are replacing in market capitalization, or total value of their outstanding shares. Those figures, as of yesterday, were Pfizer, $271.4 billion; AIG, $191.3 billion; Verizon, $102.2 billion; International Paper, $20.5 billion; AT&T, $15.3 billion, and Kodak, $7.2 billion.

The three ousted companies were the smallest in the index in terms of market capitalization.

Ma Bell is being supplanted by one of her offspring: Verizon is the successor company to one of the seven regional phone companies created by the court-ordered breakup of AT&T in 1984. SBC Communications Inc., another Baby Bell, joined the Dow in 1999.

AT&T has been in the index since 1939, when it replaced IBM Corp. (IBM wasn't added back to the Dow until 1979.) Kodak has been in the index since 1930 and International Paper since 1956.

Being a Dow component enhances a company's prestige and visibility — and being dropped can sting a company's pride.

AT&T, in a statement, did not mention the Dow specifically but said the company remains "one of the world's leading communications companies" and "a bellwether of the U.S. economy."

Pfizer's selection "appropriately reflects the importance of this sector to investors, patients and the global healthcare community," Pfizer Chairman Hank McKinnell said in a statement.

Kodak shares sank $1.07 to $25.10 yesterday, AT&T fell 27 cents to $15.31, and International Paper eased 8 cents to $20.49, all on the New York Stock Exchange. Also in Big Board trading, AIG jumped $1.97 to $73.32, Pfizer rose 54 cents to $35.59, and Verizon gained 36 cents to $36.90.

Prestbo, in an interview, called the Dow "a subjective index" that attempts to reflect the changing character of the stock market and the economy as a whole. But to keep continuity, he said, "the idea is not to change the Dow very often."

There is no "watch list" of stocks on the way out or on the way in, Prestbo said. Instead, he and Paul Steiger, managing editor of the Wall Street Journal, sit down sometimes as infrequently as once a year to discuss the composition of the index.

Charles H. Dow created the Dow in 1896. There were 12 stocks in the first index. It was expanded to 30 in 1928.

Critics sometimes brand the Dow as stodgy, but with the latest move, Dow Jones has replaced 14 of the 30 stocks since 1991, adding more service and technology issues to the mix.

One of the more controversial reshufflings came in 1999, when Sears Roebuck & Co., Union Carbide Corp., Chevron Corp. and Goodyear Tire & Rubber Co. were shown the door in favor of SBC Communications, Home Depot Inc., Intel Corp. and Microsoft Corp. The latter two were the first Nasdaq-traded stocks in the Dow's history.

"We continue to be a services and healthcare economy," and the Dow reflects that, said Charles B. Carlson, an editor at Dow Theory Forecasts, a Hammond, Ind.-based investment newsletter.

With the elimination of International Paper, he noted, basic-materials stocks will drop to 5 percent of the Dow's weighting. Even so, industrial and materials stocks still represent 30 percent of the index's weighting, Carlson said.

Despite its name, the modern Dow has never been a purely "industrial" index. In 1928 it included theater chain Paramount Publix and retailer Woolworth.

Carlson praised Dow Jones for moving carefully with index changes, noting that during the tech-stock boom of the late 1990s the firm was under great pressure to include some high-fliers in the Internet sector that have since crashed.