Which Company Should Replace AIG in the Dow?

By Matthew Hougan

Despite the bailout, it's time to remove AIG (AIG) from the Dow. Here's the short-list of which company might replace it.

[Correction:  An earlier version of this article had errors in the weightings and market caps. The article has been corrected below.] 

There are a couple of ways to approach that question.

The 10 largest companies by market-cap that are not in the Dow are:

Google (GOOG): $137 billion
Cisco (CSCO): $135 billion
Apple (AAPL): $121 billion
Wells Fargo (WFC): $115 billion
PepsiCo (PEP): $113 billion
Philip Morris (PM): $109 billion
ConocoPhillips (COP): $108 billion
Schlumberger (SLB): $104 billion
Oracle (ORCL): $96 billion
Abbott Labs (ABT): $92 billion

There are a few other smaller companies I might put on the "short list" because they represent areas of the economy where the DJIA has little coverage:

Amgen (AMGN) (biotech): $68 billion
UPS (UPS) (transportation): $67 billion
Monsanto (MON) (agriculture): $63 billion

That gives us 13 candidates. Off the top, we can eliminate PepsiCo (too similar to Dow component Coca-Cola (KO)) and Philip Morris (too toxic, even for a company controlled by Rupert Murdoch). That leaves us with 11.

Where will Dow go? 

It's impossible to say for sure. Unlike other indexes, the components of the DJIA are picked on a highly discretionary basis. We can, however, look at the current components of the Dow to see where the index is over- and under-concentrated.

The following table compares the sector weights of the Dow with the sector weights of the S&P 500.

Sector	Weight	# of Components	S&P 500 Weight	Difference
Industrials	20.94%	7	11.39%	9.55%
Information Technology	15.45%	4	15.94%	-0.49%
Energy	11.66%	2	13.14%	-1.48%
Consumer Staples	13.92%	2	12.29%	1.63%
Financials	9.27%	5	15.00%	-5.73%
Consumer Discretionary	9.96%	3	8.90%	1.06%
Healthcare	8.83%	3	13.02%	-4.19%
Materials	5.36%	2	3.65%	2.21%
Telecommunications	4.62%	2	3.11%	1.51%
Utilities	0%	0	3.56%	-3.56%
Source: IndexArb and S&P. Data as of 9/16/08.

Obviously, Industrials are the big difference—the Dow Jones Industrial Average is overweight Industrials.  Big surprise.

Beyond that, the two biggest areas of focus are Financials (where the Dow is underweight 5.73%) and Healthcare (where it is underweight 4.19%).  The Financials discrepancy will widen with the removal of AIG.

With that in mind, I'm going to bet on Wells Fargo and (darkhorse pick) Amgen as the two leading candidates. There's certainly going to be pressure to pick Google, Apple or Cisco, but the index already has strong technology representation. Schlumberger?

Of course, Dow might decide to reshuffle more than just AIG. It often makes multiple changes at once. I'd put General Motors on the watch list for exiting the index as well.

Comments

[OilCity:]

What about Berkshire Hathaway similar same industry

2008 Sep 17 03:51 PM

[rebl01:]

I was thinking the same thing. My bet was on either MON or UNH

2008 Sep 17 04:26 PM

[bbzz24:]

that is easy the Federal Reserve: it has the biggest growth potential over the next few years.

2008 Sep 17 04:29 PM

[Murali Thoota:]

Berkshire Hathaway sounds good. It's market cap is higher than all that you listed....

2008 Sep 17 04:35 PM

[Kelly Liebe...:]

Might want to wait another few months, there may be a few more positions opening up...

2008 Sep 17 08:39 PM

[doylegroup:]

KFT is the winner, not on your list

2008 Sep 18 09:30 AM

[trader_murf:]

KFT who woulda thunk it. Don't get me wrong I have a position in it for no reason I can justify. Guess every dog has its day.

2008 Sep 18 10:12 AM

[wallyjm:]

i believe csco fits the bill.

2008 Sep 18 12:27 PM

[Scammr:]

The 3 US energy majors should all be included -- COP is the one.

2008 Sep 18 01:53 PM