A New Economic Metrics Model? (2)

Dow Jones IndexS&P Dow Jones Indices announced that Apple (AAPL) will be added to the Dow Jones Industrial Average, replacing AT&T (T), after the close of business on March 18, 2015; release attached. Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow. American Telephone & Telegraph was added to the Dow Jones Industrials on October 4, 1916. It was rename AT&T on April 20, 1994, and deleted from the Dow on April 8, 2004. After the change, Verizon, which was also one of the original seven spun-off, Bell Atlantic, will be the only telecommunications issue left in the Dow.

On November 1, 1999, SBC Communications, which formerly was Southwestern Bell, one of the seven ‘baby bells’ spun-off by AT&T in 1982 (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West – all 7 were added to the S&P 500), was added to the Dow. As a barometer of the times, the Dow Average has the great strength of continuity.

Telecommunication’s index weight will be reduced to 1.80%, from the current 2.94%, as Verizon becomes the only issue representing the sector in the Dow. As of last night’s close (3/5/15), the split, combined with the membership change, will reduce Visa’s position in the price-weighted index from #1, at their current $274.13 price, to #21, at $68.53, reducing its weighting percentage from 9.71% to 2.53%.Dow Jones Index

Apple will enter the index in the 5th position, accounting for 4.66%, even as it is the largest publicly traded issue by market value in the world (all subject to change based on the March 18 close). Visa has been the best performing issue in the Dow since the close of 2013, accounting for approximately 21% of the gain. To some degree, the impact on the Dow of the split is similar to profit taking, since the gains were locked in and the issue reweighted; at the new weighting, Visa would need to decline 75% in price to negate the 21% gain it added to the Dow since 2013.

Technically, Visa’s 4-for-1 stock split will not count as a Dow split, since it occurs before the addition. However, the Dow is price weighted, with Apple being 5th in the Dow, as compared to 1st in the S&P 500 (by market value) and twice that of #2 Exxon – bottom line is Apple has weight in the Dow, but it’s not the giant it is in the S&P 500, so don’t expect its impact to be the same, in either direction. Currently the DJIA is owned by S&P Dow Jones Indices, which is majority owned by McGraw-Hill Financial, it is the most notable of the Dow Averages, of which the 1st (non-industrial) was 1st published on 16 February 1885.

Dow Jones Index