Apple In The Dow? Stock Too Expensive

Bloggers, magazines and newspaper columnists agree. They want Apple (AAPL) in the Dow Jones industrial average.

Their reasoning seems sound. The world's largest company by market capitalization, it's known for innovative products that customers line up to buy and it makes oodles of cash.

Since Apple began its big move in April 2003, its stock is up more than 9,000%. If it had been a Dow component, the world's most famous market benchmark would have fared much better.

But tech companies, especially, have a poor record once admitted to the index.

Microsoft (MSFT) is the poster child for disappointing investors. It was admitted Nov. 1, 1999, less than two months before it made its all-time high.

Or take Cisco Systems (CSCO). Since joining the Dow on June 8, 2009, it's fallen 15%, while the Dow rose 43%. (Cisco has dived 79% since peaking in March 2000.) Intel (INTC) and Hewlett-Packard (HPQ) have also underperformed the Dow since their 1997 admission.

Even IBM is a long-term Dow laggard. Big Blue joined on June 29, 1979, and has advanced 944% vs. the index's 1,392%. It's done better in recent years, outperforming the Dow 131% to 98% since the Dow's March 2009 low.

The likely reason is that by the time a company enters the Dow, its best growth years are behind it. In the tech world, it's easy for a company to be left behind.

BlackBerry maker Research In Motion (RIMM) was once king of smartphones. Now everybody wants an iPhone. RIM shares have fallen from triple digits to single digits.

A spokeswoman for Dow Jones Indexes, which maintains the Dow 30 and other indexes, said earlier this year that its service center was hit with callers demanding Apple's inclusion.

"We're not getting as many now," said Rebecca Patterson. "It's now Facebook (FB). It depends on what's happening at the moment.

At this point, it's unlikely that Apple would become one of the elite 30 stocks, says one of the Dow's chief guardians. At about $570 a share, its moves would have an outsized effect.

Most indexes, like the S&P 500 and Nasdaq Composite, weight stocks by market cap. Big companies have the most clout.

But the ancient Dow is price weighted. IBM at 192 accounts for nearly 12% of the index movement. Chevron (CVX), the only other Dow stock above the century mark, is another 6%.

The average price of a Dow component hovers near 55.

The only way Apple could be considered for Dow membership would be if it split, say 10 to 1.

Splits have become less common as companies grow comfortable with triple-digit stock prices. Extreme splits are rare, but not unheard of. Chinese web portal Baidu (BIDU) split 10 for 1 in May 2010 in the midst of a long rally.

The Dow was started May 26, 1896, by Wall Street Journal co-founder Charles Dow, who averaged the price of 12 stocks and called it an index. It wasn't intended to be a general market proxy. It contained only industrial companies. There were — and are — separate indexes for utilities and transportation (originally rails).

Over the years, as stocks split, dividends issued, or new companies were added, divisors were created to give Dow continuity.

Since 2010, entry to the Dow is controlled by a panel composed of the Journal's managing editor, the head of Dow Jones Indexes research and the head of CME Group (CME) research. The Dow indexes are 90% owned by CME and 10% by Dow Jones, which is now owned by Rupert Murdoch's News Corp. (NWS) When a stock exits, the whole list is reviewed, with sector make-up in mind. Dow selection is subjective, in contrast to most indexes, where strict rules determine what companies go in or out.

To become a Dow component, a company must have an excellent reputation, sustained growth and interest many investors. Apple easily meets those criteria. But its high price is a deal breaker.

"The Dow is unique in that it has been continuously calculated using the same methodology for more than a century," John Prestbo, head of Dow Jones Indexes oversight panel, wrote in his blog earlier this year. "Wonder how the market will perform as we come out of a recession? Or how it might respond to changes in economic policy? The Dow is the index that offers the most complete dataset. Changing the methodology would essentially obliterate this history."