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How Now The Dow?


Finance: Markets

How Now the Dow?

The new tech stocks may not juice it up all that much

When the Dow Jones industrial average first closed north of 10,000 on Mar. 29, pundits wondered how much sooner the milestone would have been reached if the dowdy Dow had included such high-flying tech stocks as Microsoft Corp. and Intel Corp.

Now, that question will no longer be mere market musing. Microsoft and Intel will join the Dow 30 on Nov. 1, along with hardware superretailer Home Depot and SBC Communications, a hard-charging former Baby Bell. These four replace some of the most venerable corporate names in America--Chevron, Goodyear Tire & Rubber, Sears Roebuck, and Union Carbide, all of which have been in the Dow at least since 1930. Union Carbide Corp., which is being acquired by Dow Chemical Corp., was heading for the exit anyway, but the others got an unceremonious boot.HISTORIC MOVE. The changes were announced on Oct. 26 by The Wall Street Journal, whose editors select the stocks for the average. The move is historic, too, in that Microsoft and Intel are the first Dow industrials not to trade on the New York Stock Exchange.

It's about time. "They've addressed the major criticism of the Dow, that it's too stodgy and not representative of the New Economy," says Charles B. Carlson, editor of Dow Theory Forecasts, an investment newsletter and portfolio manager of the Strong Dow 30 Value Fund. "The Dow has been modified to move into the 21st century."

The addition of Microsoft and Intel doubles the number of tech stocks from two to four. The two already there are IBM, added in 1979, and Hewlett-Packard Co., which came in 1997. Still, the four stocks will account for only 16% of the Dow's weighting. By contrast, the Standard & Poor's 500-stock index is 25% technology. (Standard & Poor's, like BUSINESS WEEK, is a division of The McGraw-Hill Companies.)

The new entrants give the Dow more of the look of a growth-stock portfolio. The Dow's price-earnings ratio jumps to 29.2 from 26.6, and the dividend yield drops from 1.81% to 1.54%, according to Birinyi Associates, a Westport (Conn.) stock-market research firm. Microsoft doesn't even pay a dividend, and Intel's payout comes to just 0.2%.

The higher valuations might suggest a more volatile Dow ahead. But that's not necessarily so. "If you look at earnings predictability and stability, the new entrants are much better than the companies they replace," says Carlson. And while the four newcomers together have more than 11 times the market capitalization of those they replace, that doesn't matter in the Dow as it would in the S&P 500. In the Dow, changes in the highest-priced stocks carry the greatest impact. American Express Co., at 151, is the highest-priced Dow stock, and there are another six stocks ahead of Microsoft.

Would the Dow have reached 10,000 any sooner if Microsoft and Intel were already in it? Birinyi Associates recalculated the average as though the Nov. 1 changes were made last Dec. 31. By that count, the Dow would have breached 10,000 just 11 days sooner, on Mar. 18, and would have been at 10,559 instead of 10,350 on Oct. 25.

There's no question that the Dow's new members will give it a boost if tech stays strong. But it's probably not as big as the pundits would have thought.By Jeffrey M. Laderman in New YorkReturn to top

TABLE

The Big Changes in the Dow 30

WHAT'S IN...

MARKET

REVENUES* P-E** CAPITALIZATION***

COMPANY BILLIONS RATIO BILLIONS

MICROSOFT $20.9 55.3 $467.2

INTEL 28.8 30.7 239.2

SBC COMMUNICATIONS 29.6 22.3 164.0

HOME DEPOT 34.3 48.0 103.3

...WHAT'S OUT

CHEVRON $25.8 27.2 $59.0

SEARS ROEBUCK 40.7 8.0 10.5

UNION CARBIDE 17.2 34.5 7.9

GOODYEAR TIRE & RUBBER 12.5 16.0 6.3

*Based on last four quarters

**Based on current fiscal year earnings estimates

*** As of Oct. 27

DATA: BLOOMBERG FINANCIAL MARKETS

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