Bellwether Dow average takes stock of the times Index restructures to reflect shifts

March 13, 1997|By Jay Hancock | Jay Hancock,SUN STAFF Sun staff writers Bill Atkinson and Sean Somerville contributed to this article.

American business is more about microchips and medicine these days than ingots and oil wells, and yesterday officials altered one of the economy's marquee vital signs to reflect the change.

Dow Jones & Co. ejected four longtime members of its bellwether 30-stock Dow Jones industrial average -- including Bethlehem Steel Corp. and retailer Woolworth Corp. -- and replaced them with medical concern Johnson & Johnson, Wal-Mart Stores Inc. and two other newcomers.

The change, effective Monday, is the first in the Dow 30 since 1991, when three stocks were changed. The newest additions boost the index's representation of the technology, health care and finance sectors.

Petroleum company Texaco Inc. and Westinghouse Electric Corp. also are being kicked out of the Dow club. Replacing them are computer maker Hewlett-Packard Co. and financial powerhouse Travelers Group Inc., owner of Baltimore-based Commercial Credit Co.

The stock prices of the initiates were expected to rise today; those of the retired were predicted by some to fall and by others to stay steady. Many investors use some or all of the Dow components to guide their stock holdings, and some Wall Street analysts expected financial players to buy the newcomers and sell the dismissed when markets open this morning.

But the broader result is symbolic. The Dow, which started a century ago and once included companies such as U.S. Rubber and a handful of railroads, will look more like the United States with the new members, said economists and Dow Jones officials.

"The fact of the matter is, Wal-Mart is the leading retailer in the country," said Lacy H. Hunt, executive vice president and economist with Hoisington Investment Management Co., an Austin, Texas, financial concern. "The highest percentage of purchases now is at the discounters. That's a very sound change."

Tinkered with throughout its history to maintain its status as an economic microcosm, the Dow isn't bereft of established, smokestack firms, even with the changes. Its continuing members include: heavy equipment maker Caterpillar Inc.; airplane maker Boeing Co.; chemical concern DuPont; Goodyear Tire and Rubber Co., General Electric Co., International Paper Co. and General Motors Corp.

But it also includes companies that stretch the term "industrial," companies that founders Charles H. Dow and Edward D. Jones never dreamed of: McDonald's Corp., Walt Disney Co. and American Express Co.

"We've always thought of 'industrials' as meaning more than manufacturing," Paul E. Steiger, managing editor of the Wall Street Journal, said in a statement. Dow Jones publishes the Journal. "Nowadays, technological innovation and services of all types are major propellents of the U.S. economy."

Some think the switch is overdue.

"It should have been updated long ago," said Richard E. Cripps, chief strategist with Legg Mason Inc., a Baltimore investment house. "We are more of a service-based economy rather than one based on manufacturing."

The new Dow, Cripps added, "better reflects what it was originally intended to reflect, which is American business."

Before yesterday, the Dow was heavy with oil companies and light on medical, financial and computer concerns, analysts said, although it does have drugmaker Merck & Co., International Business Machines and American Express.

"Oil is a much smaller portion of the economy," said Maureen Allyn, chief economist with Scudder, Stevens & Clark, a Boston financial firm. "It has much less to do with it."

Even with Texaco's exit, the Dow 30 will still include Exxon Corp. and Chevron Corp. Westinghouse's departure reflects the company's decision to split off its industrial operations and to become mainly a broadcasting company, Dow Jones said.

Still conspicuously missing from the Dow, however, are two of the country's most important companies: microchip maker Intel Corp. and software giant Microsoft Corp. But the Dow includes only stocks traded on the New York Stock Exchange; Microsoft and Intel trade on the electronic Nasdaq market.

The Dow is the country's most-watched stock indicator, and its glamour has grown as its value has increased. The index, now valued at about 7,000, was below 1,000 less than 20 years ago.

But some of the stocks being removed from the index haven't kept up with their brethren.

Shares of Bethlehem Steel, whose big Sparrows Point mill is in Baltimore County, are worth half their value at the beginning of the 1980s. The stock in the Woolworth discount chain is worth about what it was a decade ago.

Wall Street will be watching the new Dow members when trading starts today, but the price swings might not be as significant as they are when other stock indexes change components.

When Standard & Poor's switches the makeup of its index of 500 big companies, scores of mutual funds designed to track the index must sell the exiters and buy the newcomers, roiling their prices.

Few mutual funds try to track the Dow. But many investors use the Dow list as a screen for stock selections, Allyn said, buying those with the biggest dividends or with some other attribute.

"We all know the index effect," she said. Stocks being added "will really get boosted up."

Stocks leaving the index may not fall much, though, she said, "because a lot of them weren't much in favor anyway."

Pub Date: 3/13/97

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