International Business Machines Corp., whose $186.60 share price and 2.6% loss in 2013 combined to restrain the Dow Jones Industrial Average more than any other stock, is about to have its influence diluted.
The world’s biggest seller of computer services will see its proportion in the gauge cut to 7.9% from 9.4% when Goldman Sachs Group Inc., Visa Inc. and Nike Inc. are added this month. Goldman and Visa, at $165.14 and $184.59, become the second- and third-most influential members of the Dow, which is weighted according to stock price rather than market value.
Reducing IBM’s influence was part of the rationale for picking Goldman, the fifth-biggest U.S. bank by assets, and Visa, the largest payment network, according to David Blitzer, chairman of the S&P Dow Jones index committee, which announced the actions yesterday. Had they been in the gauge all year, the Dow would be up 17.3% instead of 15.9%, data based on yesterday’s prices compiled by Bloomberg show.
IBM’s sway over the Dow has been “reason enough not to consider it a good reflection of the stock market,” according to Mark Luschini, the Philadelphia-based chief investment strategist at Janney Montgomery Scott LLC, which oversees $58 billion. “On certain days I’ll walk out, and I’ll know to the right of the decimal where the S&P 500 index closed. But I won’t know if the Dow Jones industrial average is above 15,000.”
Bank of America Corp., Hewlett-Packard Co. and Alcoa Inc. will exit the Dow on Sept. 20, making it the biggest reshuffling in almost a decade, according to S&P Dow Jones Indices, which administers the average. The changes may tighten its correlation with the S&P 500 and make the gauge more relevant to professionals, Luschini said in a phone interview.
Moves announced yesterday by a committee that includes editors of the Wall Street Journal will also boost the influence of banking and computer companies in the 30-member gauge as Goldman and Visa join JPMorgan Chase & Co., Cisco Systems Inc. and five other financial and technology firms. Bank of America is being removed even after rising 109% in 2012 for the Dow’s largest gain.
In Bank of America, Alcoa and Hewlett-Packard, the Dow is losing its three lowest-price shares and replacing them with members that have as much as seven times the influence. The addition of higher-priced stocks to balance IBM means the Dow will be less susceptible to swings in the computer company, which was first added to the 117-year-old index in 1932 and has been a member continuously since 1979.
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.