Potential Dow Shakeup

The market volatility of the last few months has produced a tremendous amount of fallout and we believe there is still plenty more to come.

Already we have experienced high-profile companies going bankrupt, while others have been put on government-aided life support. And companies seem to be trying every trick they know to reduce costs amid this economic recession. Layoffs have been announced, dividend payments cut, marketing budgets slashed, and even executive compensation is being toned down. 

For some companies, these actions are going to be too little, too late. What once were considered solid blue-chip companies have become little more than penny stocks. We at eChristianInvesting have been anticipating a shakeup in the Dow Jones index for some time now and believe that changes will be coming in the near future.

So who’s in and who’s out?

Well, of course no one knows for sure at this point, but here are some potential Dow shakeup scenarios.

Sure Gonners

Citigroup (C: 3.88 +0.84%) is almost guaranteed to be removed from Dow index. Citigroup’s woes have been well documented, but falling below a $1 per share on March 5 was probably the last straw.

General Motors (GM: 0.75 0.00%) is on the precipice of bankruptcy and therefore is all but guaranteed to be removed from the Dow. The company has been struggling for some time now and saw its share price fall 87% last year and has fallen 42% since the beginning of this year.

Potential Replacements

We anticipate that the upcoming Dow shakeup will reduce the number of financial stocks from its current four components (Citigroup, Bank of America, American Express and JP Morgan Chase) to only three financial stocks.

Citigroup is almost certain to be replaced and Bank of America (BAC: 13.28 +0.55%) has been discussed as a possibility. If only Citigroup is removed, it is likely they would be replaced with a non-finance stock like Gilead Sciences (GILD: 33.15 +0.39%), Costco (COST: 58.59 +1.38%), or potentially another energy stock. Should both be removed, we would anticipate either Wells Fargo or Visa being tapped to replace one of the financials.

General Motors is the other Dow component that is almost certain to be replaced. We would expect GM to be replaced with another consumer goods company. Some possible replacements would be Unilever (UL: 27.10 -0.15%), General Mills, Cadbury, or Toyota.

Other Dow Components At-Risk

While GM and Citigroup are the two components almost certain to be removed from the Dow index, they are by no means the only companies at-risk. Alcoa, Bank of America, and Caterpillar have also been discussed. However, it would seem unlikely that they would want to make wholesale changes to the Dow index at this critical time in the markets. We would expect that any changes would be restricted to two or at most three components.

These changes are certainly long overdue!