Goldman Sachs Group Inc., Visa (V:US) Inc. and Nike Inc. (NKE:US) will be added to the Dow Jones Industrial Average (INDU), replacing Bank of America Corp. (BAC:US), Hewlett-Packard Co. (HPQ:US) and Alcoa Inc. (AA:US) in the biggest reshuffling since April 2004.
The changes will boost the influence of banking and computer companies in the 30-member gauge as the fifth-biggest U.S. bank by assets and the largest payment network join seven other financial and technology firms, such as JPMorgan Chase & Co. and Cisco Systems Inc. Bank of America exits even after rising 109 percent (BAC:US) in 2012, the Dow’s largest gain. The changes will take effect after the close on Sept. 20.
Moves announced today by a committee that includes editors of the Wall Street Journal will give extra influence to the average’s newest members, due to the way the gauge is designed. Since Dow proportions are determined by stock price rather than market value, shares of Visa and Goldman Sachs, which trade above $160 apiece, will have about seven times the weighting as the constituents they replace.
“The Dow is going to look and act very differently,” Dan Greenhaus, a strategist at BTIG LLC, said in a note to clients. “Visa would become the second-most important stock in the index and Goldman Sachs the third-most important.”
The Dow’s price-weighting system has proven a barrier to inclusion for some of America’s most-heavily traded technology stocks. Apple Inc. (AAPL:US) and Google Inc. (GOOG:US), which change hands above $500, have been left out. At the same time, the three companies to be removed had the lowest prices in the average.
The addition of higher-priced stocks reduces the weighting for other members, according to a report from Bespoke Investment Group. Goldman Sachs, Visa and Nike shares have an average price of $134.48, while Hewlett-Packard, Alcoa and Bank of America trade at $14.97 on average, according to data compiled by Bloomberg. International Business Machines Corp., which comprises 9.4 percent of the Dow average, will see its weighting drop by 1.5 percent, Bespoke said.
“Clearly, Google and Apple are huge companies, very big and very well known, and there’s no question that they’re very important to the U.S. and the global economy,” David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a conference call with reporters. “The prices of their stocks are so high that putting Google in would completely distort the index and it wouldn’t work.”
Goldman Sachs climbed 3.5 percent to $165.14 in New York. Beaverton, Oregon-based Nike jumped 2.2 percent to $66.82 and Visa in Foster City, California, increased 3.4 percent to $184.59.
Palo Alto, California-based Hewlett-Packard lost 0.4 percent to $22.27 and Alcoa in New York fell 0.3 percent to $8.06. Bank of America in Charlotte, North Carolina, rose 0.9 percent to $14.61.
The Dow average was devised in 1896 by Charles H. Dow, co-founder of Wall Street Journal publisher Dow Jones & Co. It originally included General Electric Co., American Tobacco and 10 other companies before expanding to 20 companies in 1916 and 30 in 1928.
The average was last reshuffled in September, when UnitedHealth Group Inc. replaced Kraft Foods Inc., which spun off its North American grocery business.
“It’s a pretty big change,” Richard Moroney, editor of Dow Theory Forecasts newsletter who manages $180 million at Hammond, Indiana-based Horizon Investment Services, said in a phone interview. “Does it make it more representative? Yes, I think it gives you more stocks that can actually have an impact on what’s going on with the Dow.”
Goldman Sachs shares have more than tripled since their 2008 low though they remain down more than 30 percent since hitting $247.92 in October 2007. Second-quarter earnings doubled as overall revenue rose 30 percent, helped by record fees for debt underwriting. It held the top spot among arrangers of global equity, equity-linked and rights offerings in the first half, according to data compiled by Bloomberg.
“We are pleased to join this historic and significant market benchmark, and remain dedicated to delivering value for our shareholders as a member of the Dow 30,” Michael DuVally, a spokesman, wrote in an e-mail.
Goldman has struggled to separate itself from controversy in the last year. A programming error caused it to spew unintended stock-options orders on American exchanges last month, roiling markets and shaking confidence in electronic trading infrastructure. Fabrice Tourre, a former vice president, was found liable on Aug. 1 for six of seven claims related to a allegations of fraud in a failed $1 billion investment tied to the housing collapse.
Visa, which is categorized as an information technology company by S&P and a financial services firm by Russell Investments and Bloomberg, sets interchange fees and collects money for credit card-issuing banks. The stock is up 22 percent in 2013 after rising three of the last four years. At more than $180, it would vie with IBM for the Dow’s biggest weighting.
Shares of Nike have climbed every year since 2008 and traded at an all-time high of $66.98 earlier today. The world’s largest maker of sporting goods reported net income in the quarter ended May 31 of $668 million, up 22 percent from a year ago, as demand surged for running and basketball gear in its largest market, North America.
At the same time, the company reduced its annual forecast for sales and earnings and said revenue in China would decline in the next two quarters. Nike collected 9.7 of its revenue from China in its most recent fiscal year.
Alcoa, the largest American aluminum producer, is being removed after plunging more than 80 percent since its 2007 high and seeing its debt-rating cut to speculative grade this year -- making it the second junk-rated Dow average company in at least three decades. Trading around $8, it has the smallest influence on the average. The company said in a statement that the move has no effect on Alcoa’s business strategy.
Removal from the Dow “seemed almost like a preemptive move,” Jorge Beristain, a Greenwich, Connecticut-based analyst with Deutsche Bank AG, said in a telephone interview today. “Fifteen years ago these guys were the world’s biggest metals and mining company,” Beristain said. “They have pursued a strategy that has clearly not yielded results.”
Hewlett-Packard, which took an $8.8 billion writedown related to its acquisition of Autonomy Corp. in November 2012, has declined for three straight years, and at about $22 is the average’s third-smallest stock. Its trailing 12-month revenue plummeted the most in more than a decade last fiscal quarter, according to data compiled by Bloomberg.
“HP remains confident that we are making progress in our turnaround,” Michael Thacker, a spokesman, said in an e-mail. “We have delivered financial performance in line with or better than our expectations throughout this fiscal year, and remain focused on delivering shareholder value.”
Even with its 2012 gain and a 26 percent advance this year, Bank of America, the second-largest U.S. lender, remains more than 70 percent below its high of $54.90 reached in November 2006. Two people with direct knowledge of its plans said yesterday the company will eliminate about 2,100 jobs and shutter 16 mortgage offices as rising interest rates weaken loan demand.
The index change “has no impact on our business or our strategy for providing solid returns to shareholders,” Jerry Dubrowski, a Bank of America spokesman, said in a statement.
In 2004, American International Group Inc., Verizon Communications Inc. and Pfizer Inc. were added to the Dow average, reflecting the growing importance of finance and health care to the U.S. economy and stock market. Eastman Kodak Co., International Paper Co. and AT&T Corp., the average’s three smallest companies by market value, were removed.
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