iDow

Forty years ago last Thursday, Steve Wozniak went to a meeting of the Homebrew Computer Club. He came away so impressed that it led him to build the Apple 1. Forty years and one day later, it was announced that Apple (AAPL) is being added to the Dow Jones Industrial Average.

A lot can be said about how the Dow is not a very good index, and I agree, but it still represents the apex of American business. Next year the Dow will be celebrating its 120th anniversary. Just being that old deserves some respect.

Last year, Apple split its stock 7-for-1. At the time, I thought this was a play to get in the Dow.

In Apple’s case, they could be playing to get into the Dow Jones 30. Since the Dow is a price-weighted index, a $560 share price would have an outsized influence on the index. But an $80 value could be more reasonable in the eyes of the index keepers. Right now, Travelers (TRV) is the smallest company in the Dow. In fact, if its market cap were to double, it would still be the smallest company in the Dow. Apple is worth more than 15 times Travelers, so I think TRV is a top candidate to get the boot.

I was wrong about Travelers. It’s AT&T (T) that’s getting the boot. The Dow is calculated by adding up the prices of all 30 stocks and dividing by a current divisor. If you’re curious, the divisor is published each day in the WSJ. It’s currently 0.15571590501117. More simply, each $1 in a Dow stock is worth about 6.42 points.

The Dow doesn’t change very often. They made no changes to the index between 1939 and 1956 and that was a great time for the market. They made a big change in 1959 when they added and deleted five stocks. After that, no changes were made until 1976.

AT&T was added to the index in 1999 when it was SBC Communications. It later bought the legacy AT&T and took its name. The original AT&T (meaning Ma Bell) was added to the Dow in 1916 when the index expanded from 12 to 20 stocks. That remained in the index past the break up of AT&T. It wasn’t removed from the index until 2004 when SBC bought it.

Verizon remains in the Dow. The company was formed when a Baby Bell (Bell Atlantic) merged with GTE. So some of the old AT&T lives on in the Dow, but after nearly 100 years, the name AT&T is no longer in the Dow Industrials.

While it’s true the Dow isn’t a great index, sometimes people pile on. It generally follows the S&P 500 pretty closely. Personally, I prefer the S&P 500, which just celebrated its 58th birthday last week.

Posted by on March 9th, 2015 at 11:07 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.