The index's price weighting results in some quirks. IBM has almost twice the combined weighting of the Dow's four other tech members, Cisco Systems (CSCO), Microsoft (MSFT), Hewlett-Packard and Intel (INTC), which all trade in the $19 to $32 range. (Microsoft owns and publishes MSN Money.) IBM also has about 10 times the weighting of GE, even though the two have similar market values -- and comparable weights in the S&P 500.
Other big contributors to the Dow are Chevron (CVX), Caterpillar, McDonald's (MCD) and 3M (MMM). The top five Dow stocks account for 34% of the index, while the bottom five -- Alcoa, Bank of America, GE, Pfizer (PFE) and Cisco, have a combined 5% weighting. Travelers is an important Dow component, despite having the average's second-smallest market value.
Who should be in, out
As the largest company by market value and one of the biggest measured by profits, Apple deserves to be in the Dow, and so does Google, which has turned its dominant search engine into a lucrative advertising business; the company has a market value of $200 billion. Apple is the leading stock in the S&P 500 with a 4.5% weighting. It is harder to make a case that Amazon.com (AMZN) needs to be in the Dow. While Amazon has a lofty market capitalization of $102 billion, its emphasis on growth at the expense of earnings resulted in profits of just $631 million last year.
The Dow's leader, IBM, is well-managed and is the country's fourth-largest company, based on market value, behind Apple, ExxonMobil (XOM) and Microsoft. But it isn't a major tech innovator, and it generates minimal revenue growth.
If the Dow committee doesn't find a way to include high-priced stocks like Apple and Google, the next addition might be Berkshire Hathaway, whose relatively high class-B stock price, at $80, would make it an influential Dow member. Berkshire's class A shares fetch $120,000 and haven't been split since CEO Warren Buffett took control of the company in 1965. Now valued at $200 billion, Berkshire is far more than Buffett's investment vehicle, given its holdings in dozens of businesses, including the Burlington Northern Railroad and Mid-American Energy, which together produce $12 billion of net income annually.
After Berkshire, Wells Fargo may have the greatest chance of inclusion because it is one of the country's biggest banks and has a market value of $179 billion, No. 1 in the financial sector. Other candidates for admission include Oracle (ORCL), Qualcomm (QCOM) and Philip Morris International (PM) because of their substantial market value and ample profits.
Apple probably would guarantee its admission to the Dow by splitting its shares by five-for-one or 10-for-one, but that doesn't look likely any time soon. Apple hasn't split its shares since 2005, and CEO Tim Cook said on a recent conference call that it doesn't see any benefit from doing so now.
Google effectively will split its shares two-for-one through the creation of a new class of nonvoting stock, but that move seems motivated more by the desire of its founders, Larry Page and Sergey Brin, to retain control than by a desire to create a lower-priced stock. Page actually has been dismissive of stock splits, calling them "stupid" when an employee brought up the idea, according to Ken Auletta's book "Googled: The End of the World as We Know It." Page reportedly said, "If you own 10 shares at $40, or one share at $400, it's the same thing! You just need to know how to divide."
The Dow remains the most widely followed market index, even with its quirks and archaic calculation method. Yet the guardians of the Dow need to ensure that this benchmark, created in the 19th century, stays relevant for a 21st-century market.
More from Barron's:
Let's let them, Apple and Google, come back to earth first. THe NASDAQ is all ready to heavily weighted with these high flyers for everyone's good. I sauy give it a year or two more before reacting to Wall St love fest with these two.
