The Ottumwa Courier

AP National

September 10, 2013

Why the Dow is getting a makeover

(Continued)

Every change of $1 in any of the 30 Dow stocks moves the index by the same number of points, roughly seven. That gives more sway to companies with higher stock prices. And it's easier for a $100 stock to rise $1 than it is for a $10 stock. (Those numbers will change once the six-company switch happens, but not drastically.)

Apple and Google would have too much weight in the Dow if they were added. The $23 stock price of Intel, a hugely influential technology company valued at $115 billion, would not move the Dow as much as $900 share of Google, which is worth $295 billion.

It's the same reason why Warren Buffett's Berkshire Hathaway, probably one of the most diversified conglomerates in the U.S., is not in the Dow. Berkshire "A'' shares trade at $170,000.

This price weighting is one of the Dow's biggest flaws, according to investors. The index's entire formula would need to be restructured to admit high-priced stocks like Apple, Google or Berkshire.

Q: DOES THE DOW's MAKEUP CHANGE OFTEN?

Not usually. The last change to the Dow's membership happened in September 2012, when Kraft Foods was removed and replaced with UnitedHealth. Kraft was pulled because it was breaking into two separate companies, so it wasn't the large food conglomerate it once was.

The index underwent a quick succession of changes during the financial crisis, however. Citigroup, General Motors and AIG were all members at one point. AIG was removed in 2008 when it imploded and required a government rescue. GM, at the time one of the longest-serving members of the Dow, was stripped of its Dow membership when it filed for bankruptcy in 2009. Citigroup was also removed because of the problems it faced during the financial crisis.

The last time three members of the Dow were replaced at the same time was April 2004, when AT&T, Eastman Kodak and International Paper were replaced by AIG, Pfizer and Verizon Communications.

Q: HOW HAVE DOW MEMBERS DONE AFTER BEING ADDED?

A: Since UnitedHealth replaced Kraft, the stock is up 33 percent, more than twice as much as the S&P 500 stock index. In June 2009, Travelers Cos replaced Citigroup and Cisco replaced GM. Since then, Travelers is up more than 100 percent, compared with the 90-percent rise in the S&P 500. Cisco is up 31 percent.

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