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The Dow Jones Industrial Average is about to undergo its biggest change in nearly a decade.

Effective September 23, the Dow announced key changes to its 30-company roster Tuesday morning. Banking conglomerate Bank of America (NYSE:BAC), computer manufacturer Hewlett-Packard (NYSE:HPQ) and aluminum giant Alcoa (NYSE:AA) are all out. Replacing those companies will be: financial firm Goldman Sachs (NYSE:GS), athletic clothing-and-gear maker Nike (NYSE:NKE) and payment processing firm Visa (NYSE:V).

According to the S&P Dow Jones Indices, which chooses the makeup of the prestigious DJIA, the departing companies were ousted because they've seen their stock prices drop too far to warrant further inclusion.

Bank of America is still feeling the ill effects of last decade's financial crisis. Its stock price is languishing around $14 a share. Meanwhile, Hewlett-Packard has been left behind in the booming tablet/smartphone marketplace (led by Apple and Samsung) and was trading at about $22 a share this week. Finally, Alcoa has seen the price of aluminum plummet in recent years, thanks (in part) to lower international demand. Despite being the nation's largest aluminum producer, its stock is trading at about $8 a share.

The three companies leaving the DJIA had comprised only a combined 3 percent of the total average, and they possessed the three lowest-performing stocks of the 30-member group. The average is compiled by adding up the prices of the 30 member stocks and then dividing it with the Dow Divisor, which is adjusted based on changes in the member companies' structures - which now stands at about 0.13. The larger a company's stock price, the bigger share of the DJIA it comprises. Companies like Google and Apple are left out because their stratospheric stock prices (about $888 and $502, respectively) would distort the final number.

Visa was trading at nearly $184 a share Tuesday and will make up the second-largest portion of the Dow, behind only IBM (trading at nearly $187). Chevron (about $122 a share) and 3M (about $118 a share) were second and third in terms of the Dow makeup, but Goldman Sachs (nearly $165 a share) will bump both of those companies down one spot on the list. Nike was trading at about $66 a share Tuesday, which places the Oregon-based athletic company in the middle of the pack, in terms of portion share. S&P Dow Jones said the moves should not impact the total level of the DJIA.

David Blitzer, managing director of the index committee at S&P Dow Jones Indices, said the three companies that were chosen for inclusion will present the Dow a different mix of industries. Blitzer said Goldman Sachs, in particular, will give financial firms a larger representation on the DJIA. He said this even though JP Morgan is already included in the Dow, and it conducts similar types of investment banking.

Berkshire Hathaway, trading at about $113 a share Tuesday, seems to have been a far better fit than Goldman Sachs. Omaha-based Berkshire Hathaway (NYSE:BRK.B), led by Warren Buffett, is a conglomerate with hands in industries ranging from insurance to clothing and media (the company owns newspapers such as the Buffalo News).

While Buffett may not be making billions off newspapers in 2013, Berkshire Hathaway is thriving in the financial field. Its work in the loan, bonds and business services helps the company bring in upwards of $163 billion in revenue annually. Its far reach would have offered a broader, more representative share of the marketplace compared with Goldman Sachs, which - in a lot of ways - is merely a carbon copy of JP Morgan. If officials truly wanted to incorporate different industries, then Berkshire Hathaway - which accounts for dozens of industries - would have been a perfect fit for inclusion this time around.

Nonetheless, Dow officials hope this move can help spur the DJIA on to even greater success. The Dow hit an all-time high just last month and was up about 100 points Tuesday from the close of business Monday, thanks in part to the news. The DJIA stood only a few hundred points off that peak number of 15,658.

For the year, the Dow is up 15.2 percent.

The news already helped the Dow's new members. Goldman Sachs shares increased about 3 percent Tuesday, while Visa went up 2.3 percent and Nike 2 percent. These three companies - coming from investing, credit and apparel - also offer a good perspective on where America is headed. They replace three companies from industries - manufacturing, banking and personal computer manufacturing - that have been on the decline for some time. The average American can't go a day without seeing a Nike commercial or using a Visa credit card. But traditional personal computers and printers are losing market share each day.

Knowing this, should we now dismiss the three departing companies?

Actually, in spite of its poor performance over the past few years, Hewlett-Packard's stock has actually been rebounding in 2013 and was up more than 50 percent from the end of 2012.

However, Alcoa was valued as highly as $50 per share as recently as six years ago and dropped 7 percent this year alone. Bank of America stock lost more than two-thirds of its value from the pre-recession era in 2007.

Of course, the DJIA is constantly evolving and these types of adjustments are nothing new. Tobacco, cattle, lead, leather and photography companies have come and gone from the DJIA. In fact, only one company - General Electric - remains on the Dow from the original list's inception in the late 1800s.

The Dow's makeup is adjusted whenever it's deemed necessary. Alcoa had been a member for 54 years, while Hewlett-Packard was brought on in 1997. Bank of America had been on for only five years. The last change to the DJIA was in September 2012, when insurance company UnitedHealth Group Inc. (NYSE:UNH) replaced Kraft Foods (NASDAQ:KRFT) - which itself had just joined the DJIA in September 2008.

The government bailout during the recession led to Citigroup Inc. (NYSE:C) and General Motors (NYSE:GM) being removed from the Dow in June 2009, in favor of insurance company Travelers Cos. (NYSE:TRV) and networking firm Cisco Systems (NASDAQ:CSCO).

The Dow's makeup after the switch on September 23 will include:

  • 3M (NYSE:MMM)
  • American Express (NYSE:AXP)
  • AT&T (NYSE:T)
  • Boeing (NYSE:BA)
  • Caterpillar (NYSE:CAT)
  • Chevron (NYSE:CVX)
  • Cisco Systems
  • Coca-Cola (NYSE:KO)
  • E.I. du Pont (NYSE:DD)
  • Exxon Mobil (NYSE:XOM)
  • General Electric (NYSE:GE)
  • Goldman Sachs
  • Home Depot (NYSE:HD)
  • Intel (NASDAQ:INTC)
  • IBM (NYSE:IBM)
  • Johnson & Johnson (NYSE:JNJ)
  • JPMorgan Chase (NYSE:JPM)
  • McDonald's (NYSE:MCD)
  • Merck (NYSE:MRK)
  • Microsoft (NASDAQ:MSFT)
  • Nike
  • Pfizer (NYSE:PFE)
  • Procter & Gamble (NYSE:PG)
  • Travelers
  • United Technologies (NYSE:UTX)
  • UnitedHealth
  • Verizon (NYSE:VZ)
  • Visa
  • Wal-Mart (NYSE:WMT)
  • Walt Disney (NYSE:DIS)

Disclaimer: This discussion is for informational purposes and should not be taken as a recommendation to purchase any individual securities. Information within this discussion and investment determination of the author may change due to changes in investment strategy when warranted by changing market conditions, or if a security's underlying fundamentals or valuation measures change. There is no guarantee that, should market conditions repeat, this security will perform in the same way in the future. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that the author will continue to hold this position in companies described herein, and may change any of his position at any time. We use or best efforts to obtain good data in our models, however it can't be guaranteed that our inputs and data are correct. This is not a recommendation for readers to purchase shares in the above security without consulting your financial professional to discuss your own risk tolerance and objectives.

Source: Dow Tweaks Industrial Average Roster, 3 High-Profile Names Gone