The Dow Class Of 1991: Where They Are Now

by: Michael L. Boyer

Charles Dow began publishing the average of 12 active stocks in 1885. In 1896 the Dow Jones Industrial Average (DJIA) was created, expanding to 20 stocks in 1916 and 30 stocks in 1928 where it stands today. While other indexes have emerged, the DJIA is still among the most recognizable measures of U.S. stock market performance.

Analyzing the composition of the Dow over time can offer a look at what Jeremy Siegel might dub "tried and true" stocks, companies that have stood the test of time. Siegel's analysis in "The Future for Investors" (2005) and "Stocks for the Long Run" (2008) tracks stock since 1802, making a striking case for stocks over the very long term.

A 20-year time frame, however, is a more practical and realistic time frame for the average long-term stock investor. Moreover, the past twenty years have seen tremendous changes: the rise of the internet, the aging of the baby boomers, and pronounced impacts from globalism and what Thomas Friedman terms a "Flat World."

These changes can even be seen in the Dow components. Consider that the Dow class of 1991 still featured names that were icons of the past. Companies like Woolworth, Bethlehem Steel, and Westinghouse are no longer on the index twenty years later. And once venerable names like General Motors (NYSE:GM) Phillip Morris (NYSE:PM), Eastman Kodak (EK), and Sears (NASDAQ:SHLD) have slid off the list--but remain publicly traded--as a result of technological advances, retail trends, and social changes.

What is most interesting for investors is to study those firms that survive, and especially those that thrive, over the long-term in a market index. One of Siegel's most unique insights in his study of long-term survivors in the SP 500 is that the winners are often mundane firms that have consistent earnings, pay solid dividends, and sell at reasonable P/E ratios relative to the market.

For example, Tootsie Roll Industries (NYSE:TR) has logged over 100 years on the NYSE and ranks as one of the top 10 performers in the SP 500 from 1957-2003 according to Siegel's research. As hundreds of the latest and greatest technology firms rose and fell, and faded into corporate history, Tootsie Rolls kept rolling off the line. The simple candies sold for a remarkably stable price and gave long-term investors the sweetest treat of all ($1,000 invested in 1957 would have grown to $1,090.955 by 2003, an annual 16.11% return!)

The Dow Survivor Portfolio

Of the 30 members of the Dow class of 1991, the following 18 made the 20 year reunion and are still on the list. Their stock appreciation from 4/1/1991 to 7/1/2011 (without dividends reinvested) follows the symbol.

3 M (NYSE:MMM) 239%; Alcoa (NYSE:AA) 42.7%; American Express (NYSE:AXP) 500.48%; AT&T (NYSE:T) 119.26%; Boeing (NYSE:BA) 179.91%; Caterpillar (NYSE:CAT) 1,283.23%; Coke (NYSE:KO) 411%; DuPont ( DD) 103.84%; ExxonMobil (NYSE:XOM) 396.40%;GE (NYSE:GE) 155%; IBM (NYSE:IBM) 587.73%; Johnson & Johnson (NYSE:JNJ) 513%; JP Morgan (NYSE:JPM) 491.95%; McDonald's (NYSE:MCD) 983.82%; Merck (NYSE:MRK) 67.26%; Proctor & Gamble (NYSE:PG) 546.76%; United Technologies (NYSE:UTX) 1,177%; Walt Disney (NYSE:DIS) 249%

Despite the widely reported lost decade in stocks (2000-2010), some of these firms show respectable gains from 4/1/1991 to 7/1/2011. Many pay strong dividends, and reinvested dividends would have added greatly to the returns.

Of course, like any class reunion, some of the changes in the composition are just technical changes in the names, resulting from marriages, and divorces. Texaco, for example, married Chevron, and took that name. Kraft (KFT) broke off from Phillip Morris/Altria (NYSE:MO). Now Kraft is back at the reunion on its own but looking at splitting along global and North American lines, a move discussed in a previous article.

Of the spring 1991 graduating class that are still on the DJIA at the twenty-year reunion, the top performers in share price appreciation are the following firms:

  1. Caterpillar (1,283.23%),
  2. United Technology (1,177%),
  3. McDonald's (983.82%),

Scanning the winners from the class, several themes and trends emerge.

Siegel's D-I-V

Siegel's research suggested a strategy founded upon dividends, international presence and reasonable valuation (Dividends, International, Valuation) could indicate future outperforming companies. Certainly, those are some relevant metrics for the top 3 stocks from the Dow class of 1991. Their current dividend yields, percentage of international sales from 2010, and current P/E ratios are telling:

  1. Caterpillar (Div Yield: 2.2%; 62% of sales outside North America; P/E: 14.6)
  2. United Technology (Div Yield: 2.7%; 61% total international net sales; P/E: 14.04)
  3. McDonald's (Div Yield: 2.7%; 66% of revenues outside US; P/E 18.01)

There is a remarkably similar pattern as all three stocks garner a majority of their revenues in international markets (61-66%); pay dividend yields above the SP 500 average of 2.03% (2.2%-2.7%); and have substantially lower P/E's than the SP 500 of 20.59 (at 14.6, 14.04, and 18.01). So the D-I-V metrics indicate that these stocks are on pace to continue their leadership. In addition, all of the top three firms have extremely strong management and very strong brands.

Most Likely to Succeed for Dow Class of 2031

The companies that make the DJIA class of 2031 in twenty years will likely be those with strength in the D-I-V + M&B framework (dividends, international presence, low valuation, and strong management and brands) model.

To find the winners at the next reunion, look for:

  1. Firms poised to benefit from growth in emerging markets and globalism, in general. The growth rates and rising incomes in these markets could fuel the future growth of tomorrow's market leaders.
  2. Remember, however, that growth alone does not equal profit. Focus on what you are paying for that growth because high flying, fast growing stocks (especially those with very high P/E ratios) have not proven their performance could match the promise of their lofty P/E ratios over the long term; those voted the most likely to succeed by this metric, seldom do.
  3. The best performers in the Dow from the past 20 years were hiding in plain sight (under the ubiquitous golden arches, at every construction site, and making air conditioners). The winners from the last twenty years were all companies that an average person or investor could observe or interact with on a regular basis. This could be the case for the next 20 years.
  4. Above average dividends and below average P/E ratios are the mantras for long-term success. The tandem impacts of a strong and rising dividend combined with a low P/E ratio (paying a fair price for those earnings) is hard to overstate.
  5. Strong management and strong brands are the final rocket fuel for the steady upward trajectories of the "tried and true" stocks bound to lead the Dow class of 2031.

Disclosure: I am long KFT, PG. All stocks mentioned owned via index funds and ETFs.