GM may free a spot in the Dow
Now that a trip to Bankruptcy Court has become a near-certainty for General Motors Corp., the automaker’s removal from the Dow Jones industrial average also appears all but inevitable.
“Certainly the march of events suggests that change might be imminent” in the 30-stock index, John Prestbo, executive director of Dow Jones Indexes, said Wednesday.
That’s because bankruptcy and nationalization -- the U.S. government could eventually own as much as 70% of GM -- are basically automatic tickets out of the Dow, Prestbo said.
Which leads to the question: What company would replace GM in the Dow, the most widely followed, if not the most comprehensive, gauge of the U.S. stock market?
Business news channel CNBC is running a poll on its website with eight companies to choose from: financial companies Wells Fargo & Co. and Goldman Sachs Group Inc., online retailer Amazon.com Inc., oil company ConocoPhillips, pharmaceutical firm Abbott Laboratories and tech giants Apple Inc., Google Inc. and Cisco Systems Inc.
As of late Wednesday, Apple was in the lead with 20% of the vote; Abbott Labs was second with 15% and Wells Fargo was last with 9.4%.
Much of the debate over GM’s successor has centered on whether it should be another “consumer discretionary” company -- one whose products tend to sell poorly during tough economic times.
If the Dow’s keepers stick with that sector, retailer Amazon.com would be a logical choice. But additions to the index often are in entirely different industries from the companies they replace.
For example, in 1999, old-line blue chips Chevron Corp., Goodyear Tire & Rubber Co. and Union Carbide were replaced by Intel Inc., Microsoft Corp. and SBC Communications (now AT&T; Inc.) to give the index more of a “new-economy” feel (right before new-economy stocks headed over a cliff).
Last fall, food giant Kraft Foods Inc. took the place of fallen insurer American International Group Inc., and in early 2008, Bank of America Corp. and Chevron replaced cigarette maker Altria and manufacturer Honeywell.
How about Ford Motor Co.? What could very well be the only member of the once-Big Three to avoid bankruptcy has shown signs of staging a turnaround. But with the future of the company and the rest of the global auto industry still very much in flux, choosing Ford would be a risky move. And because the Dow is price-weighted, the stock, trading for less than $6 a share, would exert comparatively little influence on the index.
Prestbo noted that the Dow also tends to avoid stocks with relatively high prices, which could count against Google, with its $400-plus share price.
Japanese automaker Toyota Motor Corp., whose U.S. shares trade on the New York Stock Exchange, would be an intriguing choice, but Prestbo ruled that out.
“We have never had a foreign company” in the Dow, he said, “and we would not consider adding one now.”
