DJIA Component Replacement Candidates for GM (GM, F, CSCO, ORCL, GOOG, AAPL, CL, HON, PEP, TGT, MDT, ABT, GS, BRK-A)

The bets are on that General Motors Corp. (NYSE: GM) is done as far as the current stock is concerned.  While it seems that the equity holders of today will keep 1% of the “New Co.,” this is far from fitting into parameters of being one of the thirty components of the Dow Jones Industrial Average.  We have speculated on this with other companies moving in and out, but we have compiled a list of companies which we think could be replacements.  We have also listed some of the companies we think will not be included that many traders and investors might be hoping could be up for inclusion.

There is one obvious replacement, but this may be like marrying a third cousin.  Ford Motor Co. (NYSE: F) is believed to be the only non-bankrupt US automaker.  Its $5.50-ish price leaves little ambition for the index, although this might create the least amount of inter-index re-weighting changes.  We’d be surprised if the DJIA brought this one back in even if Ford was a component before.  The index board is probably ready to be out of the US auto sector.  With $100+ billion in sales, you never know.

In technology stocks, the clear candidate to be added would be Cisco Systems Inc. (NASDAQ: CSCO).  Its $108 billion market cap compares to $39.5 billion in trailing revenues.  Its technology runs the world’s data and telecom infrastructure and CEO John Chambers believes he can maintain growth on earnings, cash, and revenues for the long-haul under normal economic conditions.  Its one issue its zero dividend.  For this to be included, Chambers might need to start paying out some money every quarter.  The runner up in technology is Oracle Corp. (NASDAQ: ORCL) with a $96 billion market cap.  Oracle’s  dividend has a very low yield, but it does pay one.  For whatever it is worth, Intel did pay a dividend when it was added to the DJIA 30 while Microsoft did not.  Both Cisco and Oracle have market capitalizations that are less than than Apple Inc. (NASDAQ: AAPL) and Google Inc. (NASDAQ: GOOG).  But they have more history over the long haul.  Google’s share price (and Apple’s to a lesser extent) is a huge hurdle that automatically disqualifies it with IBM being 9% of the DJIA and it having nearly 4-times the share price.

Colgate-Palmolive (NYSE: CL) technically fits the bill as a P&G or quasi-J&J.  Its $64.00-handle and a $32 billion market cap might smooth out some of the DJIA volatility.  The $54.36 to $80.49 range of the last year does not scream volatility.  The issue here is that $15+ billion in annual sales is not exactly an economic endorsement of the greater US economy.

Honeywell (NYSE: HON) and Altria Group (NYSE: MO) were already booted out of the DJIA 30 and were replaced by Chevron Corp. (NYSE: CVX) and Bank of America Corp. (NYSE:BAC) .  Honeywell is one that should have arguably never been booted out of the index as a move away from conglomerates, but that is for the index people to decide.  Its 52-week trading range is $23.06 to $60.08.  The company’s $24 billion market cap leaves little to be desired, but it also had $36.5 billion in trailing revenues and it is very diversified.

PepsiCo. Inc. (NYSE: PEP) is the ideal candidate in food and beverages.  We think this one should have gone in rather than Kraft Foods.  Its $50+ price and $79 billion market cap make it better than the $25 handle and $37 billion market cap of Kraft.  Pepsico had $43 billion in 2008 revenues, greater than the $42 billion from Kraft.  Pepsico’s top competitor and DJIA component Coca-Cola had ‘only’ about $32 billion in 2008 revenues.

Target Corp. (NYSE: TGT) could be an underdog entrant.  It competes head-to-head with Wal-Mart, but is much smaller at $64.9 billion vs. $405 billion in trailing year sales.  Its $40 price would give it a lower weighting than Wal-Mart’s $50-handle.  Its $31 billion market cap is less than one-sixth that of Wal-Mart, but it is the number-two retailer in the U.S.  We’d be surprised if Target was chosen, but would not be shocked by any measure.  Its 52-week range is $25.00 to $59.55.

Medtronic (NYSE: MDT) and Abbott Laboratories (NYSE: ABT) both seem possible replacements on the surface.  Medtronic’s $34.00-ish handle and a $38 billion market cap are lower than Abbott’s $44-ish handle and lower than its $69 billion market cap.  Medtronic generated $13.5 billion in fiscal 2008 sales against Abbott’s $29.5 billion.  The more diversified pick in medical is Abbott Laboratories (NYSE: ABT).  There is one problem for both of these companies… they are 100% tied to healthcare spending.  The index decision board probably wants to steer clear of another medical-related company with the uncertainty that lies ahead beyond 2009 with a nationalized or quasi-national healthcare system.

Goldman Sachs Group Inc. (NYSE: GS) is another long-shot.  It is the most likely to come in if the Dow index people want a financial leader, but the time it has been public and the notion that a $140+ share price would make it the highest in weighting would be an issue.  “Golden Slacks” has been speculated or noted by outsiders, but we think this would only occur if there was a major realignment taking out many of the current 30 components of the index.  We see little chance of this being the GM replacement, despite a $72 billion market cap.

Berkshire Hathaway (NYSE: BRK-A) fits the bill on the surface, but is hopeless after you get past the reverence for Warren Buffett.  Many used to ask “When?” rather than “If?” it would be added. But the fact that it has been deemed as a virtual mutual fund in the past would certainly be an issue for the prestigious index criteria.  With Buffett leaving the top post soon and without a dividend and without a stock split there is no shot at all.  Forget about Berkshire Hathaway being added despite a $142 billion market cap.

The DJIA 30 index is a price-weighted index, and this can play tricks on this index criteria.  That is particularly the case when you consider how many current components have much lower share prices than historically.  Adding in components with very high share prices also becomes a factor because it can take the index moves out of whack.  IBM has over 9% of the current weighting, and the top 8 components of all 30 components have almost 50% of the entire index weighting in the DJIA 30 Index.

Change is coming to the DJIA.  Our only thought is whether this is 1 stock or many.  We’d also expect some form of announcement on this within the next week.

JON C. OGG
May 27, 2009