The Dow Jones Industrial Average was looking a little oilier and a little more financial on Feb. 19, 2008, after swapping Altria Group, Inc. (NYSE:MO) and Honeywell International Inc. (NYSE:HON) out for Bank of America Corp (NYSE:BAC) and Chevron Corporation (NYSE:CVX). At the time, the index had only just begun to decline from its late-2007 peak, and the choice of Bank of America was inexplicable. No other stock in this foursome had declined more than 7.5%, but Bank of America had already fallen by 30% from the day of the Dow’s peak to the middle of January, only to recover for an 18% loss at the time of its addition.
In the five years since the Dow’s change-up, an equal amount (let’s say $1,000) invested evenly in both pairings would have resulted in $1,779 from the Altria-Honeywell group and $957 for the Bank of America-Chevron group. The Dow’s handlers’ bad timing is well-known. From 1997 through early 2005, during which time the Dow replaced 11 stocks, additions lost an average of 2.6% each, while deletions gained 2.8% apiece. The swap of 1999 is particularly egregious, as it added two of the world’s largest tech companies at the height of the dot-com bubble, only to watch them slide and never recover.
In fact, if the Dow had kept its original 30 stocks, simply holding those that didn’t fail and doing nothing else, the nine remainders would have topped out at more than 30,000 points in late 2007. The difference in compounding would have earned you 66% more during those 79 years.
Chevron’s 60% gain in five years, however, is worth roughly nine times Bank of America’s 69% loss for the Dow thanks to the difference in their share prices and the index’s price-weighting formula. Chevron currently holds more sway than all but one of the Dow’s components, so despite Altria and Honeywell’s combined growth, their subsequent superior gain may not have influenced the index more than Chevron’s gain has. Five years later, one share of both stocks was still worth $10 less on a combined basis than a single Chevron share.
Happy birthday, Chevron
Chevron’s return to the Dow was a nice birthday present for the then-129-year-old company. Established on Feb. 19, 1879, Chevron has played an integral role in the growth of America’s oil industry, particularly in its development on the West Coast. Within a year of its creation, Chevron — as Pacific Coast Oil — had built California’s largest and most advanced refinery, begun one of the nation’s earliest concerted drilling efforts, and built one of the earliest oil pipelines.
It was an auspicious start, and the company’s continued growth soon brought it to the attention of John D. Rockefeller, the legendary leader of the Standard Oil Trust. The two companies were initially competitors, but Standard’s superior scale and financial wherewithal soon allowed it to dominate the West as it had the East. Pacific Coast Oil, unable to regain its original market position, sold itself to Standard Oil’s California subsidiary in 1900.
