Alcoa Inc.’s speculative-grade credit ranking at Moody’s Investors Service makes it only the second junk-rated Dow Jones Industrial Average company in at least three decades. It took four years for the first to be ejected.
The New York-based aluminum producer was lowered last week by Moody’s, following General Motors Corp. as the only Dow member below investment grade since at least 1980, according to Howard Silverblatt, an analyst at S&P Dow Jones Indices. While the guidelines don’t mention debt ratings, Dow companies become vulnerable when their finances deteriorate, says Richard Moroney, editor of Dow Theory Forecasts newsletter.
Alcoa shares have declined 67% in the past decade through yesterday, leaving the company with the lowest share price and market value in the Dow, as surging aluminum production in China led to a supply glut. While S&P Dow Jones says inclusion in the average is not governed by quantitative rules, the index provider prefers “sustained growth.” Alcoa’s revenue has declined for four straight quarters and 2012 net income was less than a tenth what it was five years earlier.
The junk rating “is one more chink in the armor in terms of Alcoa fitting in there,” Moroney, who manages $175 million at Hammond, Indiana-based Horizon Investment Services, said in a phone interview last week. In the case of GM, the index provider “didn’t do anything for a long time. It seemed like GM was not a blue chip, but it’s still a bellwether. It’s hard to say the aluminum industry is truly a bellwether. I do think once they make a move, Alcoa will be gone.”
The Dow average’s stocks are chosen by editors of the Wall Street Journal, unlike most indexes maintained by S&P Dow Jones that are picked through an objective, rules-based process. While changes in membership are unusual, they often involve more than one company at a time, according to Dow’s guidelines.
Dave Guarino, a spokesman for S&P Dow Jones Indices, declined to comment on potential changes. Monica Orbe, a spokeswoman for Alcoa, declined to comment on the index.
“Alcoa is focused on the things we can control,” Orbe said in an e-mail response to questions. “We will continue to execute on our strategy and remain focused on our 2013 goal of generating positive free cash flow.”
Alcoa’s market value of about $9 billion makes it less than one-third the size of Travelers Cos., the next-smallest company in the Dow, and smaller than 361 stocks in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. About $28 billion in products such as exchanged-traded funds are linked to the Dow and changes prompt money managers to buy or sell shares to match the adjustments. Almost $5.6 trillion is benchmarked to the S&P 500.