Cisco, which makes computer networking gear, is filling the role left by GM after 83 years as part of the Dow. Travelers, the property and casualty insurer and one-time division of Citicorp, will replace its former parent. The changes to the 30-stock index take effect June 8.
"Cisco makes the paving bricks for the information superhighway and it's affecting the culture in kind of the same way that automobiles affected the culture in the 20th century," John A.
Prestbo, editor and executive director of Dow Jones Indexes, told The Associated Press. "We thought it was a fitting replacement for General Motors."
Prestbo said Dow Jones tapped Travelers for the index to add back a major insurer after dumping American International Group Inc. in September. AIG's shares had tumbled and the federal government funneled billions to the company to keep it afloat during the financial crisis. Kraft Foods Inc. replaced AIG.
And the government has, through bailout money, become a major Citigroup shareholder and reduced its role as a publicly held company.
"We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake," Wall Street Journal Managing Editor Robert Thomson said in a statement. He has the final say on changes to the index.
Cisco can replace GM also because the aim of the index is to reflect most major industries, except for utilities and transportation companies, which are accounted for by other indexes.
Nicholas Colas, chief market strategist for ConvergEx Group, in New York said Cisco was a logical choice not only because the company's business is an important one but because its shares aren't as high as some companies analysts speculated might have been added, like Apple Inc. or Google Inc.
The Dow is weighted by price so adding Apple and Google, which each have triple digit share prices, could have been more disruptive. Cisco at $19 won't have as much weight as IBM Corp. at $106. Google, at $417, would have vaulted to the most influential Dow stock. By comparison, Cisco will have roughly a 2 percent weighting.
"Anything with a $100-plus stock like an Apple or a Google would have given the stock too much weighting," Colas said. Either stock would have trumped the approximately 10 percent weighting held by IBM.
The low share value of Citi and GM mean they have held less sway in recent months. On Friday, GM accounted for about 0.07 percent weighting in the index.
Prestbo said stocks price didn't drive the decision.
"All we were concerned about is the quality of the company and the kind of the role it plays in the economy," he said.
Dow will adjust the formula by which the index is calculated so the addition of Cisco and Travelers won't affect the value of the average.
Changes occur rarely, though GM's removal was expected because bankruptcy disqualifies a company from being part of the index.
GM shares hit 27 cents during trading Monday, the lowest price in the company's 100-year history. Shares of the automaker have lost 99 percent of their value since touching a multiyear high in October 2007. The Dow is down 38.4 percent from its record high of 14,164.53 in October 2007.
GM was added to the Dow twice, first for about a year and a half in 1915 and then in August 1925. Only General Electric Co. has been a component longer. The conglomerate has been in the index since it began with 12 stocks in 1896.
Analysts also expected Citigroup might be removed from the index as the company's share price tumbled 87 percent since the start of last year. Citigroup joined the Dow in March 1997 as Citicorp.
Travelers merged with Citicorp to form Citigroup in 1998. Citigroup then spun off Travelers in 2002.
Prestbo said Dow Jones left Citigroup and GM as a part of the blue chip index longer than it might have in less volatile markets. He said the extraordinary conditions of the bear market and recession made the stocks more relevant for a longer period than might have been the case in more normal times.
Travelers rose $1.25, or 3.1 percent, to $41.91, while Cisco jumped $1, or 5.4 percent, to $19.50 on a day when the Dow soared following better-than-expected reports on U.S. manufacturing, consumer spending and construction spending. The Dow closed up 221 points.
GM ended flat at 75 cents. It is expected stockholders will be wiped out in the bankruptcy.
Citi slipped 3 cents to $3.69.
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