In case you haven’t heard, Dow Jones Industrial Average component Kraft Foods (NYSE:KFT) is going to split up its business. Via a spinoff that was first announced in 2011, the consumer giant will become two companies — a North American grocery store provider that will retain the Kraft name and peddle items like Miracle Whip and blue-box Macaroni & Cheese, and a global snack foods giant with the cumbersome name Mondelez.
The move creates some trouble in the Dow 30 list, because the spinoff essentially will cut the footprint of the stock in half. That will make beverage-and-snack giant PepsiCo (NYSE:PEP) larger by market cap — and Kraft won’t be much bigger than cereal giant General Mills (NYSE:GIS).
And if you want to be really critical of the Dow, other stocks might have to get the heave-ho, too. Aluminum giant Alcoa (NYSE:AA) is a mid-cap stock these days with a valuation of under $9 billion. Hewlett-Packard (NYSE:HPQ) has lost about half of its value in the past year and could very soon be on the outs if it can’t turn things around.
It all adds up to a looming shakeup for the Dow, according to many experts. So the question is: If Kraft or any other component gets booted from the benchmark index … what stock should be the new member?
A number of writers here at InvestorPlace have our own suggestions, and here they are:
My methodology was to look at Dow 30 stocks and wrap my head around what segment of the market is underserved in the list based on the our current American economy, and to pick the leading company in that sector. What I came up with is that retailing is decidedly underrepresented in the Dow Jones Industrial Average — and as such, Amazon.com (NASDAQ:AMZN) is the natural choice.
Amazon has redefined retail and proven the power of e-commerce. It has decidedly blown up the old publishing business model, and it currently is gutting brick-and-mortar electronics and entertainment stores like Best Buy (NYSE:BBY).
AMZN is worth a stunning $97 billion — bigger than even Kraft’s current $67 billion — and unlike fading Dow tech stock Hewlett-Packard (NYSE:HPQ), it’s clearly part of the new American economy in a digital age. In fact, it’s one of the 30 largest U.S. companies overall by market cap.
You might scoff at this because of Amazon’s admittedly high price-to-earnings ratio. Well, consider that Amazon did $48 billion in revenue for fiscal 2011 and is forecast to bring in more than $63 billion in fiscal 2012. In 2011, the combined operations of Kraft did about $55 billion. Even if the company were to lose some share price, its sales are very real.
And sales are the story here. Dollars spent via retailing are an important indicator of the stock market and the economy, and there truly is no better indicator of retail in 2012 than Amazon.
The only big hurdle is the the price weighting of the index and the $215 share price as a disruptor of the Dow’s current system. But frankly, Amazon has changed the rules since it’s creation so why stop now?
– Me (InvestorPlace editor Jeff Reeves, that is)
It’s time to put Comcast (NASDAQ:CMCSA) in the Dow Jones Industrial Average. The blue-chip index needs more representation from the content and distribution industry if it wants to remain a proxy for the American economy.
Comcast is the nation’s biggest cable company, largest residential Internet provider and a top-three telephone provider. It also owns a majority stake in NBC Universal, making it a big player in network TV and Hollywood. The company also has major interests in a number of cable channels.
In short, Comcast is a diversified media company, both in creating it and distributing it. If the Dow is supposed to be a sort of proxy for the U.S. economy, it could do with more representation from the entertainment sector. As it’s currently constituted, the Dow claims just one content creator/distributor: Walt Disney (NYSE:DIS).
As for value, volume and share-price profile, Comcast also fits well with the blue-chip index. It certainly has the market cap to warrant an elevation to the Dow. Indeed, with a total stock market value of $85 billion, it’s among the handful of S&P 500 companies that big that are not in the Dow.
Additionally, with the stock trading at about $30, Comcast wouldn’t have any kind of out-of-whack influence on the Dow, which is weighted by share price. Comcast would have roughly the same influence on the index as JPMorgan Chase (NYSE:JPM), Microsoft (NASDAQ:MSFT) and AT&T (NYSE:T), while adding some needed exposure to a key part of the economy.
– Dan Burrows, InvestorPlace Feature Writer
First things first: Google’s (NASDAQ:GOOG) stock price of close to $600 per share is the most prohibitive factor for inclusion in the Dow.
Get over it.
The stock opened up for business at $85 per share in August 2004, jumped 18% on the first day and has never looked back. Scorching-growth companies that don’t split their stock are becoming the norm, so enough about concerns over stock price-weighting measures in the Dow.
There’s a reason for the price: Google practically invented the search engine industry, and in doing so also became a leader in cloud computing. It is the proud owner of YouTube, and it developed Android, the open-source mobile platform that powers a gazillion phones. Want more? Gmail is a software platform tool, Google TV is on the way, as is Google Books, and if you can’t find its headquarters in Mountain View, Calif., you can always Google directions on Google Maps.
Since I am limited to 250 words, let’s just say Google is an extraordinarily dynamic force across huge swaths of the American business landscape. For goodness sake, the company is a verb and a noun!
Here are some better numbers to look at: Google’s market cap of $184 billion, revenues of $40 billion, net income just a shade over $10 billion and a $48 billion cash war chest. GOOG also boasts a quarterly year-over-year growth rate of nearly 70%.
Google will be around for the long haul. Get used to the price and let ‘em in.
– Marc Bastow, InvestorPlace Assistant Editor
To me, the Dow Jones Industrial Average is about what makes American great. Decades ago, it was about railroads, cars and steel. And while these still are incredibly important today, the future is about transformative technologies like mobile and the Internet.
Apple is at the center of these forces.
What’s more, the brand is global and greatly admired. But Apple also has a powerful ecosystem, in terms of developers and its vendors. It’s a company that’s “built to last.”
Its growth prospects are still massive. Apple is in the early phases of the tablet revolution. And it likely will conquer new markets, such as interactive television.
The one argument against Apple is its high price — Given that the DJIA is a price-weighted index, the company would have represented about 11% of the overall movements. So something might need to be done to the formula to alter that. Of course, had Apple been a part of the index for, say, the past five years, it would have made the markets seem a bit more robust. During this time, Apple’s stock was up 337%.
But with so much doom and gloom in the U.S., success stories like Apple are refreshing to see. It’s time Apple gets its due and becomes a card-carrying member of the Dow.
– Tom Taulli, IPOPlaybook Editor
Alcoa and HPQ could get the boot, sure, but if the Dow decides to shake things up, Kraft is going to be the impetus. And if the giant food company were to fall out of the Dow Jones Industrial Average, why not sub in … another food company?
In this case, PepsiCo (NYSE:PEP) — the nation’s largest food and beverage business — seems like a logical fit.
Should Kraft take a post-split bow, the Dow Jones would be left with just one firm — McDonald’s (NYSE:MCD) — that deals in food. Coca-Cola (NYSE:KO) is beverages only, and Procter & Gamble (NYSE:PG) stepped out of the game for good earlier this year when it sold off its Pringles brand to Kellogg (NYSE:K).
You’re telling me America’s benchmark index should be just 3% grounded in food? Grub’s all we do anymore, guys.
PepsiCo is an American institution that is known from coast to coast — and although it’s constantly stretching its oversea-legs, PEP’s fortunes still heavily depend on what’s going on in the U.S. At 47 years old, PepsiCo is plenty established, its $110 billion market cap is very much in line with the Dow average of about $128.5 billion, and its $70 stock price won’t ruffle many feathers.
The only downside: You’re replacing a company that was food pyramid-friendly with one that keeps Wilford Brimley in the ad-acting business — and I don’t mean for Quaker Oats.
– Kyle Woodley, InvestorPlace Assistant Editor