Throw GM out of the Dow?

Despite its problems, analysts think GM's spot in the Dow industrials is safe -- for now.

June 15, 2005: 1:03 PM EDT

By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Should General Motors be booted from the venerable Dow Jones industrial average?

Such a move would have been unthinkable just a few years ago. But the world's largest automaker, a member of the Dow since 1925, has been reeling as of late.

Its auto making operations are losing money. It recently announced that it would cut 25,000 jobs by 2008. And to add insult to injury, GM's debt was cut to "junk bond" status by two credit-rating agencies last month.

The Dow is meant to include 30 leading companies in important industries that reflect the depth and breadth of the world's largest economy. But it's getting tougher to say that GM (Research) deserves to be considered a leader, if you define a leader as a company in good health.

"I think there is a remote chance of GM being removed only because the Dow people probably don't necessarily like having companies in there with a junk bond rating," said Chuck Carlson, CEO and portfolio manager with Horizon Investment Services in Hammond, Ind.

Sure, the company is still gigantic. Sales are expected to hit $153 billion this year. But the automotive industry is one where Japanese competitors such as Toyota, Honda and Nissan are making major inroads in the U.S. And GM's market value is now just $20.3 billion, making it the least valuable company of the 30 in the Dow.

Plus, there is a distinct possibility that GM could get smaller, since some analysts have called for the company to sell of its finance unit, General Motors Acceptance Corp. (GMAC). Revenues from finance and insurance accounted for nearly 20 percent of GM's total sales in the first quarter.

A spokeswoman from Dow Jones Indexes said they do not comment about speculation regarding changes to the Dow. But few expect the editors at the Wall Street Journal, who oversee the Dow, to get rid of GM anytime soon.

Tough replacing GM

The biggest reason is that it's hard to think of another automotive company to replace GM. And clearly, the industry still needs representation in the Dow.

"It's not inconceivable to remove GM. But I'm not sure if there is another automobile company that better represents the industry and the auto industry is here to stay," said Jeffrey Hirsch, president of Hirsch Organization, an investment research firm that edits the Stock Trader's Almanac.

The Dow is made up solely of companies based in the United States. So the only American car manufacturer that could replace GM would be Ford (Research), which is arguably as troubled as its Detroit counterpart.

Hirsch said that eventually some non-U.S. based companies might wind up in the Dow. He noted that for a long time the Dow excluded companies listed on the Nasdaq and that finally changed with the inclusion of Microsoft (Research) and Intel (Research) in November 1999.

"There used to be a New York Stock Exchange bias but the editors have become more progressive over the years. And in this age of a shrinking world, the Dow should represent a global economy," said Hirsch.

But the problem with most foreign companies is that they are either not publicly traded in the U.S. or they're listed as shares that track the performance on other exchanges, Hirsch noted.

The U.S. shares of overseas companies tend to be less available, or liquid, for investors, which could be a problem. So that would be one of the bigger knocks against including say, Toyota (Research) or Honda (Research), two companies that have larger market values than GM.

The Dow Jones Indexes spokeswoman said, however, that there has been no consideration of including foreign companies at this time.

No more changes for a while?
It's also unlikely that the people in charge of the Dow will want to make a drastic change anytime soon since there have been several reshufflings in the past decade.

Verizon (Research), American International Group (Research) and Pfizer (Research) were added in April 2004, replacing AT&T (Research), Eastman Kodak (Research) and International Paper (Research).

SBC (Research) and Home Depot (Research) joined the Dow at the same time as Microsoft and Intel. And in March 1997, Travelers Group (now Citigroup (Research)), Wal-Mart (Research), Johnson & Johnson (Research) and Hewlett-Packard (Research) were added to the Dow.

"There has been turnover of more than a third of the companies in the past few years," said Horizon's Carlson. "I don't think there is any pressing need to make more changes right now."

He added that even though GM may be a weak performing stock, you cannot dismiss its relevance in Corporate America. Auto sales make up nearly a quarter of all retail sales. GM also has about 150,000 employees in the U.S. and covers health care costs for nearly 1.1 million current workers, retirees and their family members.

"Historically, it's not like GM has always been a great company. It's had it's cyclical down periods. But you need to look at the import of GM, not as much a stock but as a barometer of the economy," said Carlson.