International Business Machines Corp. (IBM:US), whose $186.60 share price and 2.6 percent loss in 2013 combined to restrain the Dow Jones Industrial Average more than any other stock, is about to have its influence diluted.
The world’s biggest seller of computer services will see its proportion in the gauge cut to 7.9 percent from 9.4 percent when Goldman Sachs Group Inc. (GS:US), Visa Inc. (V:US) and Nike Inc. (NKE:US) are added this month. Goldman and Visa, at $165.14 and $184.59, become the second- and third-most influential members of the Dow, which is weighted according to stock price rather than market value.
Reducing IBM’s influence was part of the rationale for picking Goldman, the fifth-biggest U.S. bank by assets, and Visa, the largest payment network, according to David Blitzer, chairman of the S&P Dow Jones index committee, which announced the actions yesterday. Had they been in the gauge all year, the Dow would be up 17.3 percent instead of 15.9 percent, data based on yesterday’s prices compiled by Bloomberg show.
IBM’s sway over the Dow has been “reason enough not to consider it a good reflection of the stock market,” according to Mark Luschini, the Philadelphia-based chief investment strategist at Janney Montgomery Scott LLC, which oversees $58 billion. “On certain days I’ll walk out, and I’ll know to the right of the decimal where the S&P 500 index closed. But I won’t know if the Dow Jones industrial average is above 15,000.”
Bank of America Corp. (BAC:US), Hewlett-Packard Co. (HPQ:US) and Alcoa Inc. (AA:US) will exit the Dow on Sept. 20, making it the biggest reshuffling in almost a decade, according to S&P Dow Jones Indices, which administers the average. The changes may tighten its correlation with the S&P 500 and make the gauge more relevant to professionals, Luschini said in a phone interview.
Moves announced yesterday by a committee that includes editors of the Wall Street Journal will also boost the influence of banking and computer companies in the 30-member gauge as Goldman and Visa join JPMorgan Chase & Co., Cisco Systems Inc. and five other financial and technology firms. Bank of America is being removed even after rising 109 percent (BAC:US) in 2012 for the Dow’s largest gain.
In Bank of America, Alcoa and Hewlett-Packard, the Dow is losing its three lowest-price shares and replacing them with members that have as much as seven times the influence. The addition of higher-priced stocks to balance IBM means the Dow will be less susceptible to swings in the computer company, which was first added to the 117-year-old index in 1932 and has been a member continuously since 1979.
“You have three stocks that are hardly weighted at all and you’re adding three that are coming in with major weight -- 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.”
IBM has more than doubled (IBM:US) since the bull market in U.S. equities began in March 2009, a period in which it has always been the highest-price stock in the Dow. Because of the weighting, IBM’s performance has sometimes meant the difference between a gain or loss for the whole average.
On April 19, when IBM shares tumbled 8.3 percent after profits fell short of analyst estimates, the Dow trailed the S&P 500 by 0.8 percentage point, the most since December 2008. IBM’s loss cut 132 points from the Dow that day, erasing almost all the gains from other members. When the S&P 500 ended 2011 virtually unchanged, IBM’s 25 percent rally contributed almost half of the Dow’s gain for the year, driving the 30-member gauge up 5.5 percent.
While Visa and Goldman will help limit IBM’s influence, some of the most heavily traded technology stocks in the country are effectively ineligible for the Dow because of prices so high they would distort the gauge, Blitzer said.
Apple Inc. (AAPL:US), whose shares closed yesterday at $494.64, has the biggest weighting in the S&P 500 because its market value is $449.4 billion, the largest in the world. Google Inc. (GOOG:US), whose stock trades at $888.67, has a capitalization of $296.1 billion and is the sixth-biggest weighting in the S&P 500, according to data compiled by Bloomberg and S&P.
“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,” Blitzer 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.”
More U.S. companies may be priced out of the Dow as stock splits have become less common and the number of shares trading above $100 reached a record. Eleven companies in the S&P 500 have split their stock this year, compared with 42 annually since 1996, data from S&P show. That helped send the average share price to $65.96 last quarter, the highest on record.
Goldman Sachs climbed 3.5 percent to $165.14 yesterday. 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 slipped 0.3 percent to $8.06. Bank of America in Charlotte, North Carolina, added 0.9 percent to $14.61.
The Dow average climbed 35.14 points, or 0.2 percent, to 15,226.20 as of 10:23 a.m. today in New York.
The gauge 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 2012, when UnitedHealth Group Inc. replaced Kraft Foods Inc., which spun off its North American grocery business.
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.
Visa, which is categorized as an information technology company by S&P and financial services 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 and at more than $180 would vie with IBM for the Dow’s biggest weighting.
Shares of Nike have climbed every year since 2008. 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.
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 Jones Industrial Average (INDU) 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.
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 25 percent advance this year, Bank of America, the second-largest U.S. lender, remains more than 70 percent below its high of $54.90 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.
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