NEW YORK -- Dow Jones & Co. is reshuffling its benchmark industrial average for the first time in more than four years, ousting AT&T Corp., International Paper Co. and Eastman Kodak Co. in favor of financial services company American International Group Inc., telephone carrier Verizon Communications and drugmaker Pfizer Inc.
The moves, announced Thursday and due to take effect at the start of trading April 8, were designed to give a more accurate snapshot of the overall U.S. economy, said John Prestbo, editor of Dow Jones Indexes and markets editor of The Wall Street Journal, which manages the index.
"Our main focus in this particular group of changes was not who do we kick out or replace. It was to recognize the trend of the growth of the financial or healthcare sectors," Prestbo said. "When it came to selecting companies to leave the Dow to make room for the new ones, we took recognition of another trend, and that is basic materials stocks have become less important, less weighty in the market."
Although composed of just 30 companies, Prestbo defended the Dow Jones industrial index as an accurate barometer of the markets, noting that it has closely tracked with the much broader Standard & Poor's 500, which sees far more use among financial analysts.
"It's simply the best known stock index in the world," he said. "People who talk about the market in terms of what's happening today, or over the past five years or whatever, speak the language of the Dow."
The Journal's top editors evaluate and select the components of the Dow. Prestbo stressed that the selections are not made with investment goals in mind, nor are they considered recommendations on which stocks are better investment choices.
Membership in the Dow has little overall effect on most portfolios. Most mutual funds and other investments track broader rival S&P 500. But Dow membership has an enormous emotional impact for the companies and their investors.
"Everybody looks at the Dow. It's a sign that your company really is one of the engines of the economy," said Jim Raphalian, head of institutional trading at Schwab Soundview Capital Markets. "But on the other hand, it's not so much an investment index as a balanced snapshot of the market. And I think what they were trying to do here was balance it with regard to the new realities of the economy."
To be considered for membership in the Dow, companies must have consistent earnings and growth, widespread ownership among investors and represent a significant sector of the U.S. economy.
Verizon joins another Baby Bell, SBC Communications Inc., which was added to the index in 1999. It also replaces its former parent, AT&T, which had been a Dow component since 1939. International Paper had been included in the index since 1956, while Kodak had been part of the Dow since 1930.
Kodak spokesman Gerard Meuchner downplayed the company's removal from the Dow, even though the struggling film and imaging company has been one of the index's worst-performing stocks.
"Membership in any index has no bearing on our ability to manage the company for profitable growth," Meuchner said.
AT&T Corp. said that while the company and the telecommunications industry have suffered from soft demand in recent years, the company remains "a bellwether of the U.S. economy." The company's statement did not directly address its removal from the Dow.
International Paper said the changes in the Dow reflected those of the stock market, rather than a commentary on the company.
"The composition of the Dow Jones industrial average has no bearing on the company's continuing focus on adding value for our customers to help them succeed in their businesses and providing solid returns to shareholders," a company statement said.
The stocks leaving the index fell in afternoon trading on Wall Street. Kodak lost 81 cents to $25.36, AT&T slipped 26 cents to $19.31 and International Paper fell 23 cents to $42.03.
Those slated to join the Dow fared far better. Pfizer was up 48 cents at $35.53, Verizon gained 43 cents to $36.97 and AIG jumped $2.10 to $73.45.
The 30-stock index last changed on Nov. 1, 1999, when four of the 30 stocks were replaced. At that time, two Nasdaq-traded stocks, Microsoft Corp. and Intel Corp., became the first Dow components not listed with the New York Stock Exchange. Home Depot Inc. and SBC also joined, while Chevron Corp., Goodyear Tire & Rubber Co., Union Carbide Corp. and Sears, Roebuck & Co. were taken off the index.
"You never know the thinking behind the choices they make with the Dow, said Neil Hennessey, president and portfolio manager of Hennessey Funds. "Back in 1999, the stocks that they took off, from that point on through last night's close, gained 7 percent. And the stocks that were added are down on average 36 percent.
"They certainly don't make the choices based on investment criteria," he added. "But it makes sense when you see just how badly every other index performed over the last four years."
The Dow Jones industrial average was created by Charles H. Dow as a 12-stock index in 1896 and has become the primary barometer of the U.S. stock markets. Only one company, General Electric Co., remains part of the Dow from that time, and even it was removed and brought back in a number of times in the early part of the century. The second-longest tenured company on the Dow is General Motors Corp., added in 1915.
Associated Press Ben Dobbin in Rochester, N.Y., contributed to this report.
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