We have argued for years that the composition of the 30 components in the Dow Jones Industrial Average has needed a change. That change is here, and frankly some of you will question just “how DJIA” even some of the new DJIA components are. That being said, this significantly changes the balance of power for the Dow Jones Industrial Average.
Alcoa Inc. (NYSE: AA) is finally getting booted out of the DJIA, which will send it to the heap of irrelevance for earnings season once and for all. Bank of America Corp. (NYSE: BAC) and Hewlett-Packard Co. (NYSE: HPQ) are being booted out of the DJIA as well. HP is no longer a great company, and it is suffering from a serious restructuring and significant industry change dynamics. Bank of America, well let’s just be nice and say that the low stock price of this bank always has kept it from having a significant impact on the DJIA anyhow.
The additions are where the surprise happens to be, as Goldman Sachs Group Inc. (NYSE: GS), Nike Inc. (NYSE: NKE) and Visa Inc. (NYSE: V) are all joining the club. Jim Cramer used to argue endlessly that Goldman Sachs should have been added to the DJIA, so now he is being vindicated (and he used to work there). Nike seems a bit questionable, even if it is one of America’s top brands, and we would point out that Visa is already worth some $115 billion.
What you as an investor need to know is that the DJIA change here is very significant. Alcoa, Hewlett-Packard and Bank of America were all very low in share prices. That meant that they were irrelevant to the DJIA performance on any given day because of their total weightings. The three components barely accounted for 2% of the entire index weighting combined, while on an average they should have come close to 10% of the combined DJIA weighting if their share prices were higher.
Alcoa has been a DJIA stock for some time, while HP had been a DJIA stock for about 16 years. Bank of America was one of the more recent additions.
The big change that has to be noticed is that the average share prices are much higher than the companies being ejected from the DJIA. Visa’s share price is close to $180, which now actually will make it one of the most relevant DJIA stocks. Goldman Sachs is up around $160, which also will give it a significant impact on the DJIA’s daily moves. Nike’s $65 or so share price will only put it within the average of DJIA stock prices.