To all of you indexers out there, it’s good to stick with your indexing plans, but notice that these types of changes happen. Do you know how your index investments work?
This article describes changes coming to the Dow index. The index will drop Honeywell and Altria to pick up Bank Of America and Chevron. The changes will be in effect next week. The index isn’t actively managed, does not have a lot of turnover, but at this point in time there is an impact in changing a large portion of investments. This is what happens with smaller or targeted indexes. To truly track the broad market there are larger indexes such as Vanguard’s Total Stock Market Index.
Here’s a quick highlight of the companies involved in this change.
Altria was formerly Philip Morris. It is primarily a vice stock, tobacco, but still owns other operations. It has a market cap of $154B, a PE ratio of 16.59, and dividend yield of 4.13%.
Honeywell is a technology and manufacturing company with worldwide sales and diverse product lines. It has a market cap of $42.6B, a PE ratio of 18.08, and a dividend yield of 1.75%.
Bank of America is one of the big financial and bank stocks. BoA recently completed a deal to buy Countrywide Financial, the top, but troubled, mortgage lender. It has a market cap of $186.6B, a PE ratio of 12.74, and a dividend yield of 6.09%.
Chevron is an oil, chemical, mining, and energy company. It has a market cap of $166.4B, a PE ratio of 8.99, and a dividend yield of 2.94%.
All of these companies are large, and all have global operations. Honeywell is the smallest of the four and also has the lowest dividend yield. So this change will increase the market cap and the dividend yield of the Dow index. It will lower the index PE ratio. It will also shift the sector balance of the Dow, since some tobacco, manufacturing, and technology are being dropped. More financials and oil are coming in. The financials and oil seem to be more cyclical than the others, and especially now with the credit problems and high oil prices this shifts the Dow’s position in the current market environment.
Another thing this changes is the risk faced by Dow components. Altria has recently dealt with lawsuits and government regulations, but seems to be through most of it. Large portions of the lawsuits against tobacco were resolved in recent years, and global tobacco sales and prices have been strong. On the other hand, financials and oil companies have been under scrutiny for their practices and pricing. Bank of America will have it’s mortgage and credit card operations watched and possibly regulated. Chevron will be watching for regulations aimed at high profits from high oil and gas prices. On the positive side Chevron will be profiting from those high prices. And BoA will hopefully come through the credit problems and maintain both it’s high dividend and it’s credit rating.
So, what is important here? The Dow is a popular index, and popular indexes highlight the market’s performance. But you can see that this highlights part of the market, and next week that part will be different than this week. I don’t have any investments based on the Dow, but I do have investments based on other indexes. The highlight of this news to me is make sure you understand what your index is supposed to do.
