2nd UPDATE: Cisco, Travelers To Join DJIA As GM, Citi Exit
June 01 2009 - 12:53PM
Dow Jones News
Stock market participants applauded news Monday that Cisco
Systems Inc. (CSCO) and Travelers Cos. (TRV) would replace General
Motors Corp. (GM) and Citigroup Inc. (C) in the Dow Jones
Industrial Average.
GM's bankruptcy filing automatically disqualified the auto maker
from membership, while Citigroup is being removed amid "a
substantial restructuring which will see the government with a
large and ongoing stake," said Dow Jones Editor in Chief Robert
Thomson.
The two companies, which will be replaced in the DJIA on June 8,
currently account for less than 0.5% of the price-weighted index.
As such, even big price moves for the stocks have almost no impact
on the overall index.
Cisco shares were up 6.1% to $19.63 in recent trading, while
shares of Travelers gained 3.8% to $42.22. The DJIA was up 2.4% at
8715 points on renewed optimism about the economy.
The addition of Cisco, a networking-equipment company, addresses
a criticism among many market participants that the DJIA lacks the
appropriate technology company representation. With Travelers, a
property-and-casualty insurer that was spun off from Citigroup
seven years ago, financial-services companies will gain a greater
weighting, helping offset the removal of American International
Group Inc. (AIG) last September.
"Any way you look at it, these are the right two companies,"
said Nicholas Colas, chief market strategist for BNY ConvergEx
Group. "Being that it's a price-weighted index, Google or Goldman
would have thrown it out of whack." Shares of Google Inc. (GOOG)
trade at about $425 per share, while Goldman Sachs Group Inc. (GS)
trades at $147.
The changes announced Monday come fewer than nine months since
Kraft Foods Inc. (KFT) replaced AIG, when the insurer agreed to
take an $85 billion aid package from the U.S. government that has
since doubled in size. Historically, it can be years between
component changes, but the financial upheaval of the past several
months has pressed Dow Jones editors to adjust the roster of
members.
Some investors had expressed frustration that neither GM or
Citigroup were removed months ago, but Colas and others said these
criticisms largely ignore the index's purpose.
"An index is not supposed to have judgment about outcomes. So,
when something is no longer viable, like GM, then you make the
change," said Colas.
In many respects, Dow component changes aren't as important as
they were 50 years ago, as many investors are more closely attuned
to broader market indexes such as the S&P 500. Overall, roughly
$33 billion is actively tied to the Dow, compared with more than
$900 billion tracked to the S&P 500.
Nonetheless, the Dow is the first point of reference for many
people tracking the health of the U.S. stock market.
"When you're looking at performance, everyone quotes the
S&P. But the Dow still has the monopoly on watching day-to-day
moves," said Thomas Nyheim, a portfolio manager with Christiana
Bank & Trust.
Speculation has been rife for months about which companies could
replace GM and Citigroup, which have been members in the DJIA since
1923 and 1997, respectively. Names that came up frequently were
Apple Inc. (AAPL), Ford Motor Co. (F) and even Toyota Motor Corp.
(TM), which would have been the index's first non-U.S.-based
company.
Meantime, the week-long delay in adding the new components to
the DJIA means that the benchmark index will have a bankrupt
component. The delay is industry standard and a necessary move,
given the vast number of funds that track the index, with portfolio
managers needing some time to sell their shares in an orderly
manner.
Since the New York Stock Exchange moved to suspend shares of GM
Monday morning, representatives for Dow Jones Indexes said they
will use "the best available price source" for the next week.
"That might be another exchange, it might be pink sheets. But we
make this decision once the details are confirmed. Currently, our
index operations is following the situation," said a spokeswoman
for Dow Jones' Indexes.
Citi shares were down 2 cents at $3.70 in recent trading, while
GM shares were up 12 cents at 87 cents.
-By Geoffrey Rogow, Dow Jones Newswires; 201-938-5360;
geoffrey.rogow@dowjones.com
(Kevin Kingsbury contributed to this report.)