2 Stocks Added, 2 Are Cut From Dow Jones Average

Philip Morris and McDonald’s on Tuesday took the places of General Foods and American Brands on the list of 30 industrial stocks that make up the most closely watched gauge of stock market activity, the Dow Jones industrial average.

Dow Jones & Co., publisher of the index, said it was adding Philip Morris to the list because of its acquisition of General Foods, which was announced last Sept. 27. Philip Morris, based in New York, manufactures cigarettes under such brands as Marlboro and Benson & Hedges, as well as Miller beer and 7-Up, and owns the Mission Viejo real estate development concern.

American Brands will be dropped in favor of the fast-food company to avoid overweighting the average toward tobacco and packaged food sectors of the market, Dow Jones said. American Brands makes cigarettes under such brands as Pall Mall and Tareyton and also owns Sunshine Biscuits and Master Lock.

Changes in the stocks making up the index are rare, and the two substitutions represent only the 11th and 12th times that such replacements have been made in the last 30 years, according to Dow Jones. The publisher said the change would also help the average better reflect the performance of the stock market by adding another service company to a list that has been dominated by large manufacturers since it was compiled in its present form in 1928.

While several market analysts agreed with that reasoning, the move also prompted renewed criticism that the average is no longer as good a gauge as it once was of the daily ups and downs of the market. Even with Tuesday’s changes, the service, high-technology and consumer products sectors are still under-represented, the critics contend.

The index also does not accurately reflect stock trading activity of smaller companies traded on over-the-counter markets, which represent the fastest growing sector of the market, they point out.

“It’s about time they added a fast-food company, but the average is still weighted far too much in favor of smokestack industrial America and not enough in favor of post-industrial America,” said Michael Metz, market analyst with the Oppenheimer & Co. brokerage in New York.

The 30 listed companies include many of the largest U.S. manufacturers, such as Bethlehem Steel, Goodyear, International Business Machines, International Harvester, U.S. Steel, Texaco, Union Carbide and Exxon.

The daily movements of the Dow are computed by simply calculating the net change in the stocks, then dividing by a factor of 1.1. Metz noted that, because there are so few stocks in the index, a precipitous gain or loss by one of those issues can make the index misleading about the market’s direction.

For example, of the roughly 80 points that the Dow has gained in the past two months of trading, about 50 points is derived from the sharp run-up in the stocks of General Foods and Union Carbide, according to Metz. Without those gains, the Dow would have declined, “which is what it should have done, since we have seen a falling market,” the analyst said.

Analysts also noted that the Dow does not take into account what percentage of each stock’s value a daily rise or fall represents. A loss of one point would represent only about one-130th (0.76%) of IBM’s value but about one-seventh (14.3%) of International Harvester’s value.

Charles Stabler, an assistant managing editor of the Wall Street Journal, said that, despite the complaints of critics, “year in and year out, this still seems to satisfy most people.” He said that, unlike some broader indexes, all stocks included in the Dow are widely held and are being traded minute by minute.

Even some of those who point to the index’s failings acknowledge that it is not likely to be replaced as the most widely watched market gauge.

“No matter how sophisticated we are about these things in New York, the average guy west of the Hudson knows one figure, and that’s the Dow,” said Perrin Long, market analyst with Lipper Analytical Services in Manhattan. “It looks like we’re stuck with it.”

HOW THE DOW 30 HAS CHANGED July 3, 1956 International Paper replaces Loew’s June 1, 1959 National Distillers replaces Owens-Illinois Glass Anaconda replaces American Smelting Swift replaces Corn Products Alcoa replaces National Steel Aug. 9, 1976 3M replaces Anaconda June 29, 1979 IBM replaces Chrysler Merck replaces Esmark Aug. 30, 1982 American Express replaces Manville Jan. 1, 1984 Post-breakup AT&T; replaces old AT&T; Oct. 29, 1985 Philip Morris replaces General Foods McDonald’s replaces American Brands Los Angeles Times