“The Dow Jones Industrial Average is overdue for a makeover. The world’s most famous stock index hasn’t adjusted its component companies since 2009, during which time Apple (AAPL) has emerged as the world’s most valuable company, with a market value of $570 billion,” Andrew Bary reports for Barron’s. “Also conspicuous by its absence from this elite list is Google (GOOG), the online advertising-and-search behemoth. Both represent major shifts in the global business landscape in ways that current Dow components such as Hewlett-Packard (HPQ) and Alcoa (AA) do not.”

“Yet admitting Apple or Google — or any other high-priced stock — would be difficult, given the way the index is calculated. Rather than weighting component companies based on market value, as the Standard & Poor’s 500 and most other major indexes do, the Dow weights its 30 components based on the absolute price of their shares,” Bary reports. “With a price of around $605, Apple’s shares would overwhelm the index with a 26% weighting. That is double the influence of current Dow component International Business Machines (IBM), whose $207 stock price gives it a 12% weight in the index. Given its big daily swings, Apple alone could move the Dow regularly by 100 points or more. (The 9% jump in the stock after Apple reported blowout earnings last week, would have lifted the DJIA by nearly 300 points.)”

Bary reports, “As the largest company by market value and one of the biggest measured by profits, Apple deserves to be in the Dow… Apple probably would guarantee its admission to the Dow if it splits its shares by five-for-one or 10-for-one, but that doesn’t look likely any time soon. Apple hasn’t split its shares since 2005, and CEO Tim Cook said on a recent conference call that it doesn’t see any benefit from doing so now.”

Read more in the full article here.

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Apple Inc: Just way too expensive for the Dow – September 20, 2011