The Dow 30 Needs Some Spring Cleaning

Includes: AA, AAPL, BAC, USB
by: Matt Schilling

When it was created by Charles Dow and Edward Jones in 1896, the Dow Jones Industrial Average was supposed to be a benchmark in tracking the performance of companies representing various industries that fueled the US economy. Even though the 30 companies that make up the current index, have very little to do with heavy industry, they do represent very vital industries such as telecommunications and banking. That being said, I believe two of its components should be removed since they inaccurately represent their industries, and should be replaced by two companies who better represent themselves and their industry.

Removal: Bank of America (NYSE:BAC) - Even though very recent stock performance is positive, BAC single handedly ruined the US Mortgage market in 2008. Guided by a management team that continues to show immaturity, and earnings results that have been sub-par at best, BAC continues to disappoint. They currently pay an annual dividend of $0.04/share and EPS estimates are trending downward with analysts calling for a range between a loss of $0.13/share and a gain of $0.20/share. If BAC does post a loss, and gives negative guidance, a correction for this one-time titan could send the stock to the $6/share range.

Replacement: US Bank (NYSE:USB) - Even though US Bank is a blip on the map compared to BAC, there are several things going for it. As a barometer for the banking industry, USB focuses much of its business here in the US, which reinforces a certain level of investor confidence. USB has been a consistent growth play over the last two years and has recently announced a dividend hike.

The last four quarterly earnings announcements have beat analyst expectations by an average of 6%, and growth continues at a steady pace. In recent news, USB was not only on the Top Performing Banks during the CCAR stress tests, it's also raised its dividend 56%. Currently trading with a P/E ratio of 12.89 and a yield hovering around 2.5%, the conservative buy & hold investor doesn't need to worry about scandal or losing sleep at night.

Removal: Alcoa (NYSE:AA) - Alcoa is a great company, and managed very well, however a steady decline in Europe and China will hurt AA in the long run. "Alcoa is the largest U.S. aluminum producer, forecasting 7% growth in global aluminum demand this year and saying cutbacks in production will result in a global supply deficit of 600,000 tons in 2012. Alcoa added that its growth projection was ahead of the 6.5 percent rate required to meet the company's forecast of a doubling in global aluminum demand between 2010 and 2020."

In my opinion a Dow Component paying its shareholders a dividend of just $0.03/share per quarter since 2009, is pretty miserable. I understand AA is the leading US based aluminum producer, however I just don't think aluminum plays as much of a role as it has in the past.

Replacement: Apple, Inc. (NASDAQ:AAPL) - A virtual economy unto itself, what better way of measuring iCommerce then by adding Apple to the Dow 30. The addition here is not so much about Tim Cook or Steve Jobs; it's about how the iGeneration operates. Through the use of iPhones, iPads, iPods, and soon to be iTV, Apple will be everywhere and user activity will play a key role in the coming years. Apple's iWallet will allow the users of Apple products the ability to pay bills simply by using a real-time app that debits a checking account, and reconciles an outstanding debt. Technologies within the Apple pipeline will continue to amaze even the everyday user.

From an investment standpoint, Apple has been quite the darling. Shares are up almost 40% YTD and earnings estimates for the coming quarter look to get blown away yet again. Analysts are calling for an average EPS of $9.75/share, even though an EPS of $10.60-$12.00/share is certainly well within reach. AAPL has announced they will pay their first dividend to shareholders since 1995, and they'll also be performing a $10 billion share buyback program over the next 3 years. Attractive in price with a P/E ratio of just under 17, AAPL continues to shine not only as a great growth stock but also as an industry barometer (even if they're in a league all their own).

Disclosure: I am long AAPL.