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Dow trades out three companies from index

The venerable list of the US stocks that make up the components of the Dow Jones Industrial Average (DJI) will change this month, dropping three and adding three, marking a change in the industries that represent how the US economy is driven, and clearing out those that have fallen in price and drag the market index down.

As of 23 September, Alcoa (NYSE: AA), Bank of America (NYSE: BAC) and Hewlett-Packard (NYSE: HPQ) will leave the list, and Goldman Sachs (NYSE: GS), Nike (NYSE: NKE) and Visa (NYSE: V) will move in. The index will not have any erratic change or gap in value with the changeover.

First formulated and published in 1896, the index has become synonymous with being the barometer of US stock market health, marking the infamous crashes of 1929 and 1987, as well as ringing in new eras like the post-World War II industrial boom and the 1999-2000 dot com boom. It is only made up of 30 various stocks, whereas its market index rival, the S&P 500, tracks the top 500 largest US companies by market capitalisation.

These 30 stocks are chosen to reflect the kinds of industries that move the economy so that when they go up or down in share price, they act as an indicator of the general economic health and development of the nation. Periodically the mix is altered, and this current adjustment was brought on by the low stock prices of the three companies.

The first of the major stocks to announce earnings in reporting seasons, Alcoa, the aluminium producer, was once a harbinger of what the remaining season would bring investors and analysts, but its share price now stands around US$8. It fell lower during the GFC to under $6, but has not recovered well compared to the DJIA index, itself up over 130% since March 2009.

Bank of America, which only entered the index in November 2008 for the first time, came in just before the storm of the GFC hit. Its share price dropped from $50 to $5, and has climbed back up only to about $15. This is the bank with which Warren Buffett, chairman and CEO of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), entered into a deal when the bank was hurting for money, purchasing stock warrants (exercisable at $7.14) and preferred shares for $5 billion. Since the 2011 deal, Buffett’s company has made a paper profit of about $5.3 billion.

The last of the dearly departed, Hewlett-Packard, known for its PC and printer manufacturing, has been struggling to reinvent itself to enter the new generation tablet PCs, smart phones and cloud computing. Under a succession of new CEOs, the process has been slow, and without great innovations or a break up of the business divisions to separate the good from the bad, it may fall behind like Nokia or Blackberry.

Foolish takeaway

Many investors look to the S&P 500 as a better market indicator because it includes the top 500 companies, and is less open to interpretation of “what should or should not be included” in the composition. Yet as fickle as the market is, day in and day out going up and down trying to predict future earnings of companies, investors and traders have lived under the DJIA quote all of their lives, and their own trading history has been stamped indelibly by it.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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