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1 November 1979 Financial Analysts Journal Volume 35, Issue 6

The Dow Jones Industrial Average Re-Reexamined

  1. Hartman L. Butler
  2. J. Devon Allen

The Dow Jones Industrial Average, which started with 12 stocks in 1897, is the oldest continuous price index of the U.S. stock market. By the turn of the century, the DJIA included American Cotton Oil, Chicago Gas, Distilling and Cattle Feeding, and U.S. Leather. In 1928, the index was expanded to its present size of 30 stocks. Fifteen of these stocks still survive in the index, although in many cases the companies have changed their names.

The original 30 stocks were heavily concentrated in automotive issues like General Motors, Chrysler, Mack Trucks and Nash Motors. A 1953 Financial Analysts Journal article by Butler and Decker recommended that the index be broadened to include three important industries as yet unrepresented — paper, office equipment and pharmaceuticals. Three years later, International Paper was added. Another quarter of a century elapsed before IBM and Merck joined the list.

One of the problems with the current index is its sensitivity to stock splits. The original practice of entering a company at twice its current price after a two for one stock split (or three times its price following a three for one split, etc.) was dropped in 1928. Now a split reduces a stock’s weighting in the index while the divisor changes by the precise amount necessary to preserve the value of the average. The authors recommend that the original practice be resumed.

The authors also feel that the following substitutions would make the index more representative of U.S. industry in the 1980s: Dow Chemical for Allied Chemical, Philip Morris for American Brands, Caterpillar Tractor for International Harvester, Standard Oil of Indiana for Texaco, Boeing for Westinghouse Electric, K Mart for Woolworth.

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