At long last, Dow gets a taste for Apple

The decision to nudge aside AT&T, which has been part of the Dow for the better part of a century, is a recognition of how communications and technology have evolved. It's also a marker of Apple's transformation, from a struggling company with a small, fervent following two decades ago, into the nation's predominant consumer tech company.

"This is a sign of the times, and it might get everyone to look at the Dow more than they have been," said Richard Sichel, who oversees $2 billion as chief investment officer at Philadelphia Trust Co. "It would be difficult to pick any 30 companies that would cover the entire economy, especially compared with the S&P 500, but it does give the Dow more credibility."

The action, by S&P Dow Jones Indices, had been widely expected since Apple split its shares seven-for-one in June of last year.

AT&T declined to comment on its removal from the average, of which it has been a member for most of the last 100 years. The stock was added to the Dow in 1916, the year after the first-ever transcontinental telephone call. It was removed in 2004, but after SBC Communications renamed itself AT&T following a 2005 merger, it was reinstated.

"It was a new way of life: telephones, back then 100 years ago, these talking machines," said Howard Silverblatt, index analyst at S&P Dow Jones Indices. "Back then, AT&T was it, end of story."

TWIST OF FATE

After Apple's stock split, many investors felt it was only a matter of time before the company, whose high stock price had previously made it unsuitable for the price-weighted index, would join it.

The Dow industrials is the oldest U.S. stock average, first published in 1896. Its compact size - just 30 names - and its mission to reflect the U.S. economy means that many retail investors are more familiar with it than other indexes covering a broader cross-section of the market.

Even though professional managers generally benchmark against the S&P 500, additions and removals from the Dow are still a big event on Wall Street. It was last altered in September 2013 when Goldman Sachs Group Inc (GS.N), Visa Inc (V.N) and Nike Inc (NKE.N) were added.

Apple did not respond to requests for comment. The company has a market capitalisation of $737 billion, making it twice the size of the second-largest Dow component, Exxon Mobil Corp (XOM.N).

Shares of Apple rose 0.15 percent to $126.60 on Friday, while those of AT&T fell 1.5 percent to $33.48.

In a twist of fate, Apple owes some of its success to its partnership with AT&T over the iPhone, the device that propelled Apple's dominance. The iPhone first hit the market in 2007 with AT&T as its exclusive carrier, a deal that continued for more than three years.

Since the iPhone's introduction, Apple's annual revenue has risen more than sevenfold, from $24.6 billion in 2007 to $182.8 billion most recently. AT&T saw 11 percent revenue growth over the same period to $132.4 billion in 2014.

"There’s irony in that they are replacing AT&T, which helped them lift off to begin with,” said Neil Azous, founder of Stamford, Connecticut-based advisory firm Rareview Macro.

Despite Apple's size, as of Thursday's close it would only have a 4.66 percent weighting in the Dow because of its price, the index company said. Apple will join the average after the close of trading on March 18.

Most of the assets indexed to the Dow industrials do so through the S&P Dow Jones Industrials exchange-traded fund (DIA.P), commonly known as the "Dow Diamonds." It had about $12.5 billion in assets as of Thursday. By comparison, more than $1.9 trillion in assets track the S&P, including mutual funds and ETFs.

Kevin Landis, chief investment officer of Firsthand Capital Management, a Silicon Valley-based technology-investing specialist with $300 million in assets under management, said he hopes that this is not a sign that Apple is past its prime.

“The Dow Jones is such a backwards-looking list, I cringed when Intel (INTC.O) and Microsoft (MSFT.O) were added," Landis said. "I'm cringing today. Let's hope Apple can defy the forces of history."

Intel and Microsoft joined the average in November 1999, and their performance was weak for years following.