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Got an idea for a Dow stock? GM may get booted soon

May 6, 2009 |  4:47 pm

The Dow Jones industrial average may have an opening soon: Dow Jones & Co. is signaling that it's ready to kick General Motors Corp. out of the index, whether or not the company files for bankruptcy protection.

John Prestbo, executive director of Dow Jones indexes, told Bloomberg News today: “There are two choices for GM: bankruptcy or increased government ownership. Both of those events are negative for continued membership in the Dow. Definitely the trend is in the direction that would force us to remove it. I’m not going to say absolutely.”

GM has been one of the 30 Dow stocks since 1925.

But with GM at $1.66 today, down 19 cents, the stock counts for little in the Dow as it is. That’s because the Dow is a price-weighted index, which means the lowest-priced shares among the member stocks have the least effect on the index.

The last substitution of a Dow stock occurred in September, when Dow Jones booted insurance giant American International Group after the government rescued the company from collapse. Kraft Foods Inc. took AIG’s place.

If GM leaves the Dow the index would have no representative stock from the auto industry. Dow Jones could add Ford Motor Co., but given Ford’s still-low share price ($6.26 today) that seems doubtful.

Last month, MarketWatch asked some Wall Street analysts for their picks to replace GM in the Dow. Goldman Sachs Group was mentioned, although that would give the index five financial stocks (including American Express, Bank of America, Citigroup Inc. and JPMorgan Chase), or six if you include General Electric Co., with its huge financial unit.

But if the financial services industry is likely to continue shrinking, as many investors believe, why add another financial issue?

Cisco Systems and Apple Inc. also got some votes as a way to boost the tech sector’s presence in the Dow. The index now has four tech stocks: Hewlett-Packard, IBM Corp., Intel Corp. and Microsoft Corp.

Some analysts suggested adding another actual industrial company, such as Lockheed Martin Corp.

One reader commenting on the MarketWatch story had another idea:

How about [adding] the U.S. government? They make cars, money, insure, provide mortgages, invest in securities, provide rail transportation, health insurance. You know, a real all-around company.

For the current list of the Dow 30, go here.

-- Tom Petruno

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