The century-old Dow Jones Industrial Average was reshuffled yesterday in a way that reflects the strains from the recent recession, globalization and information-technology revolution on American businesses.
Three venerable but declining companies — AT&T Corp., International Paper and Eastman Kodak — were replaced by three recent winners in today’s globe-spanning competition: insurance giant American International Group Inc.; the largest local U.S. phone company, Verizon Communications; and the world’s biggest drug company, Pfizer Inc.
The changes to the 30-company index are to take effect at the open of trading on April 8.
Paul E. Steiger, managing editor of the Wall Street Journal, whose editors by tradition determine the makeup of the blue-chip index, pointed out that the makeover was not triggered by an imminent merger, as are most adjustments to the index.
Evolutionary trends in the economy and the stock market — in particular, the rise of financial and health care stocks and “the diminishing relative weight of basic materials stocks” — were the reasons for the change, he said.
In a sign of the times, AT&T, formerly “Ma Bell” and a stalwart of the Dow since 1939, was replaced by one of the seven “Baby Bells” spawned by its breakup by the federal courts and antitrust regulators in 1984.
Verizon’s rise marks only the third time that a company has taken the place of its split-up parent company in the index. Verizon’s vast and heavily populated service area in Washington and the northeastern corridor led to its dominance, with its growth recently far outpacing that of its parent corporation. It is the largest local phone service and cell-phone carrier in the country.
“Obviously, we’re very pleased about it. We think it reflects well on the strength of our business model,” said Verizon spokesman Bob Varettoni.
Analysts say Verizon and the other Baby Bells were better-positioned than AT&T to benefit from the sometimes frenetic changes in the communications market in recent years.
AT&T in a statement noted that “the entire telecommunications industry” has suffered from “soft demand and overcapacity since early in 2000,” but AT&T remains a Fortune 40 company and “a bellwether of the U.S. economy.”
Verizon joins SBC Communications Inc., another fast-growing Baby Bell in the Southwest, which was incorporated into the Dow in its last makeover in 1999.
AIG is the world’s largest insurance group by market value. It is the leading insurer of U.S. companies and pioneered the sale of life insurance in China, the world’s most populous country, where it is the top foreign insurer.
Pfizer joins drug heavyweights Merck & Co. and Johnson & Johnson in representing the health care industry in the index.
Pfizer, which manufactures the potency drug Viagra and the antidepressant Zoloft, has become the world’s largest drug maker in the past few years largely through big acquisitions. It bought Warner-Lambert Co., maker of cholesterol drug Lipitor, for $114 billion in 2000, and last year acquired Pharmacia Corp. for about $60 billion.
Eastman Kodak, based in Rochester, N.Y., joined the Dow in 1930. The U.S. film pioneer has been going through a tough transition from film-based photography to digital-imaging technologies introduced by Japanese competitors. Kodak said in January that it planned to cut as many as 15,000 jobs.
“This action in no way changes our strategy or our belief that we will be successful in implementing our strategy,” said Kodak spokesman Anthony Sanzio.
In replacing struggling companies that had their heyday earlier in the industrial era before technology and globalization transformed business, yesterday’s Dow makeover reflects the changing times.
“They’re putting in much larger companies that have had better results over the last couple of years,” said Owen Fitzpatrick, a portfolio manager at Deutsche Bank Private Wealth Management. “It’s more looking back and adjusting to the reality of what’s gone on.”
The 1999 makeover also heralded the ascendance of “new economy” technology bellwethers such as SBC, Microsoft Corp. and Intel Corp., over the “old economy” icons they replaced: Sears, Roebuck & Co., Union Carbide Corp., Chevron Corp. and Goodyear Tire & Rubber Co.
Home Depot Inc., a hardware chain store whose meteoric rise has mirrored record growth in home sales and the remodeling industry, also was added to the Dow at that time.
Charles Henry Dow, who co-founded Dow Jones & Co., created the index in 1896 with 12 companies, and an initial average price of 41. The average grew to 30 stocks in 1928, and has remained that number ever since.
The Dow ended at 10,373 after an uneventful day of trading yesterday.
• This story is based in part on wire service reports.
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