There is one critical aspect to the stock market that pertains to American International Group (NYSE: AIG) which has been given less coverage because of the media’s focus on the turmoil in the stock markets. AIG is one of the 30 components of the Dow Jones industrial average, the most widely known stock market index. AIG is on the verge of imploding, and even if it survives it will be a shadow of its former self. So this brings up a key question: Which company will replace AIG in the DJIA? This seems like it will likely take place soon. As you will see below, we have made many possible selections here.
The last DJIA membership replacements were a financial stock and anenergy stock, so we probably wouldn’t look in those sectors foranother addition this soon. Based upon the implosions in the financial sector,the index might not want another financial stock anyhow. But whatabout the former components which have managed to stabilize? AltriaGroup (NYSE: MO) and Honeywell (NYSE: HON) were replaced by Chevron (NYSE: CVX) andBank of America (NYSE: BAC). Altria is now a smaller component of its former self,but it is now acquiring UST to become the dominant player in smokelesstobacco. Honeywell is a diversified conglomerate stock. It fits the bill of a historic component.The main issue we see here with either of these ex-members is whether or not the index would want tore-add a recently booted company.
Would the DJIA be willing to add in another technology component tothe mix to now have 6 of 30 components in the index? Google Inc.(NASDAQ: GOOG) is large enough with a market cap northof $136 billion. But it falls pretty far out of the equation forhistoric picks. It would also be a serious issue because of the factthat the index is price-weighted and this would become the largestsingle component by a wide margin. Another issue is that it is deemedtoo new of a company. Apple Inc. (NASDAQ: AAPL) could always be acontender with its $122+ billion market cap. It had $24 billion inrevenue in 2007 and analysts expect more than $32 billion this year andabout $40 billion next year. The issue here is the growth has been sodramatic and it wasn’t that long ago that the company was floundering before Steve Jobs came back and took the helm. Its stockprice might be too high and give it the largest weighting. But onepick which would likely work in technology is Cisco Systems Inc.(NASDAQ: CSCO) with its $132 billion market cap. Cisco’s sales in thisfiscal year were $39.5 billion. They are expected to grow to $43 billionin 2009. The company is THE telecom and communications equipmentbeast on the planet. It has proven to be a far better and moremechanized operation and has grown its dominant position over Lucent,Nortel, 3Com and many others. Cisco’s stock price is also low enoughin the $20’s that it would not be disruptive to the other index memberweightings.This would allow it to join IBM, H-P, Microsoft, and Intelin the technology components. In technology, Cisco seems to be themost likely candidate.
PepsiCo. Inc. (NYSE: PEP) might be the prime candidate if the index wantsanother food and beverage component. Pepsi is actually bigger thanCoca-Cola, which iis already a a component of the DJIA. Pepsi did$39.4 billion in 2007 revenues while Coca-Cola did $28.85 billion in2007. Coca-Cola’s market cap is $126 Billion and Pepsi’s is$113 Billion. Pepsi is an ideal candidate for the index.
Berkshire Hathaway (NYSE: BRK-A) fits the bill on the surface. In fact, many used to ask “WHEN?” rather than IF it would be added. But thefact that it has been deemed as a virtual mutual fund in the past wouldcertainly be an issue for the prestigious index criteria. With WarrenBuffett leaving the top post soon, this pick wouldn’t be a likely add evenif they said they’d finally start paying dividends and split the stockto a reasonable level. Forget about Berkshire Hathaway being added despite a $192 billionmarket cap.
Colgate-Palmolive (NYSE: CL) technically fits the bill. It wouldjoin J&J and P&G in the index, although J&J has become halfdrug and medical company and half consumer products company. Theproblem with Colgate-Palmolive is that there are so many largercompanies which could be added here. It fits the bill, but it is justso much smaller than its two major competitors. Its $78 share price might also give it a higher weighting than many other components. For several reasons, we think Colgate-Palmolive won’t make the list, but we won’t be overly shocked if it made the list either.
It wouldn’t seem that the index would choose another drug company tojoin Pfizer and Merck with all of the problems the sector has endured. What could be a sneaky way of achieving this is by using a medical devices company or a broader medicalcompany. Medtronic (NYSE: MDT) has almost $60 billion in market cap. It alsogenerated $13.5 billion in fiscal 2008 sales. Its stock price in the$50’s would be a good fit. The more diversified pick in medical isAbbott Laboratories (NYSE: ABT). Its market cap is $91 billion and itsstock price in the high $50’s would be acceptable. Its sales werealmost $26 billion in 2007 and it is expected to grow to $32 Billion in2009. Abbott seems to be a better choice than Medtronic on the surface.
Lastly, this will affect the DIAMONDS Trust (AMEX: DIA) ETF and other ETF’s which track the DJIA. We do not know if ANY of these stocks will be the final selection. Most of Wall Street was very surprised at the last change earlierthis year buy the components which were booted more than by thecomponents which were added. But either way, the DJIA likely hasan index membership change coming VERY soon.
We put in a call to the Dow Jones Indexes group to see if anannouncement is as imminent as we would think it is. As expected, a call back to us mirrored the “no comment” release the index group put out this morning.
Jon C. Ogg
September 16, 2008
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