DJIA Picks Kraft As Unusual AIG Replacement (KFT, AIG, PEP, KO)

Earlier this week in the midst of the American International Group (NYSE: AIG) meltdown we brought up the issue that AIG was about to lose its standing as a member of the prized Dow Jones Industrial Average.  This morning the indexes group named Kraft Foods  Inc. (NYSE: KFT) as the replacement for AIG.  This will take place on September 22.  Out of all of the companies we picked, this is perhaps one of the more unusual ones.

Kraft has a real problem as a stock.  It is the former Altria (MO)spin-off that has not been on its own for that long. Krafthas also been plagued with problems and it has been dead money itsentire history of being a public company.  What it has going forit is a $50 billion market cap and a $33 stock price which won’t disturbthe weightings too much of other DJIA components. It also had $37.2 billion in sales last year.

Pepsico, Inc. (NYSE: PEP) would have made a far better choice in ouropinion.  It looks like the index change may have defaulted to a shareprice issue since the DJIA index is a share price-weighted index ratherthan a market-weighted one.  Pepsi’s $72.00+ stock pricewould have been the third- or fourth- largest weighting in the exchange.  Kraft willrank right in the middle since 13 of the 30 existing components(ex-AIG) have lower share prices.  Pepsi’s market cap of$113 billion rivals that of DJIA component Coca-Cola Co. (NYSE: KO).Pepsi also generated $38.4 billion in revenue in 2007, far more than Coca-Cola’s $28.8 billion.

Kraft is a less obtrusive addition to the DJIA.  We still think Pepsico would havebeen a far better choice and more representative for the index.  But itwould have also punished the lower-priced stocks in the indexbased upon the re-weighting trades.  That’s what makes it a horse race.

Jon C. Ogg
September 18, 2008