In Search of a Dow Stock
When General Electric gobbles up Honeywell, there will be room for another stock on the Dow. Speculation about which company will be anointed is fun, but if it is another low- or no-yield company, that will further shrink the pool of high-yield stocks from which we select our Foolish Four. Is it time to move to a different pool?
By Ann Coleman (TMF AnnC)
October 27, 2000
General Electric's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> acquisition of Honeywell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HON)") else Response.Write("(NYSE: HON)") end if %> will clear the decks for another stock to join the Dow Jones Industrial Average (DJIA), probably sometime around February if antitrust issues are resolved quickly.
Honeywell has been a Dow stock less than a year, having merged its way into the index last December in a deal with Allied Signal. Now, it is disappearing into that grand purveyor of many electronic and electric goods, General Electric. GE will pay 1.055 shares of GE stock for each of Honeywell's 801 million outstanding shares, and will assume some unspecified amount of debt.
The story of the merger is right out of Hollywood. GE has been considering buying Honeywell for about two years, but the company had quietly put together a new proposal for another look just last week. Then, last Thursday, near the end of trading, GE Chairman Jack Welch was on the floor of the New York Stock Exchange. He watched Honeywell jump 10 points, and knew that someone else must be after them. That turned out to be another Dow stock, United Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTX)") else Response.Write("(NYSE: UTX)") end if %>.
Not one to let an opportunity like that one slip by, Welch put the GE proposal into high gear and rolled right over United Technologies, five minutes before Honeywell was ready to sign the deal. I'm thinking Ed Harris for the movie.
An informal, non-scientific survey indicates that the mostly likely candidates (according to people who write, as opposed to people who actually select the stocks) are Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> or Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>. I tend to favor Cisco, for what that's worth, which is about as much as my guess on the next Super Bowl winner.
With dividend yields either puny (Pfizer) or nonexistent (Cisco), we aren't likely to see either of these stocks on the Foolish Four, though, so why do we care?
We care because of those puny yields. Stocks added to the Dow over the last 20 years have outperformed those dropped from it. The Foolish Four's mission is to beat the Dow. As more high-growth, low-dividend companies are added to the index, the index should theoretically do well. However, it will be harder to beat with a value-oriented high-yield-based strategy if the newcomers never become eligible because they only pay token dividends, or none at all.
That, of course, is only true as long as we are in a growth-oriented market. I can easily imagine a shift back toward value stocks, especially after the Nasdaq slaughter on Wednesday and Thursday. (Thursday, the market rebounded nicely before its close, but around early afternoon it was down a heart-stopping 4%. Not that I was watching...)
If you've been reading with a critical eye, you may be thinking this sounds a bit like whining. I'm not complaining about the Dow getting harder to beat. It's always been hard to beat. Stocks have always been added and they are usually more growth-oriented than the older members. That's why they tend to beat the stocks that are dropped. Besides, the Foolish Four isn't going to beat the index by a substantial margin until the market shifts to value investing. At that point, a Dow heavily weighted by technology stocks could be much easier to beat! Of course, we don't know when that will happen.
What I am getting more and more worried about is the lack of emphasis on dividends that we've seen in the last several Dow shake-ups. That's something new. Prior to 1991, it was unthinkable that a low-yielding company would be added to the Dow.
Now, though, it's getting harder and harder to hook four good, high-yielding stocks if we have to keep fishing in this shrinking pond. Another low- or no-yield stock added to the index would be one more good reason to move to a bigger, or at least different, pond.
Fool on and prosper!
