SCENARIOS: What will replace GM if it leaves the Dow?

NEW YORK Fri May 29, 2009 1:13pm EDT

NEW YORK (Reuters) - General Motors Corp is widely expected to be removed from the prestigious Dow Jones industrial average, as it heads toward almost certain bankruptcy. The automaker's removal would make it the first company to be removed from the Dow due to bankruptcy in 27 years.

It would leave a hole in the 30-stock Dow .DJI that will be swiftly filled.

But which company will be added to the 103-year-old average if GM (GM.N) is jettisoned?

Bankruptcy looms for GM with a government-imposed June 1 deadline as it attempts to restructure under the direction of U.S. President Barack Obama's administration.

It would be the biggest bankruptcy for a U.S. industrial company and the third-largest in U.S. history after investment bank Lehman Brothers and telecommunications company Worldcom.

If GM does go bankrupt, the company would be removed from the average, John Prestbo, executive director of Dow Jones Indexes and the chairman of the DJI oversight committee has said.

Analysts do not agree on the size and sector of the company that would replace GM in the Dow. There are several avenues the index could take, ranging from well-known tech names like Apple or Cisco, to GM's rival, Ford.

"The question will be, do you go with another manufacturing company, given the U.S. is less sensitive to that than it was many years ago, or do you go with the direction of the future, which is services?" asked Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

There is also the possibility that the index's oversight committee could take the opportunity to shake up the ranks and replace more companies than just GM.

Analysts have speculated that Citigroup (C.N) and Alcoa (AA.N) could also be dropped as their market capitalizations dwindle in the midst of the economic downturn.

In September, insurer American International Group (AIG.N) was replaced by food maker Kraft KFT.N as AIG was bailed out by the U.S. government in the wake of Lehman Brothers' collapse. It was the first time the committee elected to remove only one Dow component since 1982, the year American Express (AXP.N) replaced Manville Corp.

Manville was also the last company to be removed from the index as a result of bankruptcy. The company made asbestos products and was sued by ill workers and families. It exited the Dow on August 30, 1982.

The following are possible entries into the Dow industrials as discussed with market analysts:

AETNA INC (AET.N)

Share price: $26.80 Market Cap: $12 bln

Prestbo has said that the insurance industry is currently not represented on the Dow after AIG's removal. However, overhauls to the U.S. healthcare industry make such an addition problematic.

APPLE INC (AAPL.O)

Share price: $134.11 Market Cap: $119.6 bln

Is there a more ubiquitous name in both the market and in the consumer sector right now? Apple remains a highly regarded brand and after stumbling earlier in its history, has become an earnings powerhouse. It straddles the consumer-discretionary and technology sectors, but tech is already well represented with IBM (IBM.N) , Microsoft (MSFT.O), Intel (INTC.O) and Hewlett-Packard (HPQ.N).

CISCO SYSTEMS (CSCO.O)

Share price: $18.24 Market Cap: $105.3 bln

The networking giant has been a consistent earner and a bellwether in the technology sector. Investors often look to Chief Executive John Chambers for his outlook on the economy. But the sector is well-represented and such a move might necessitate removing another tech stock.

FORD MOTOR CO (F.N)

Share price: $5.57 Market Cap: $17.7 bln

The obvious candidate to replace GM is Ford, the only U.S. carmaker not accepting government money, analysts have said. However, Ford shares break the unwritten rule of being under $10. While that is not a hard-and-fast rule, and several Dow components now trade at less than $10, DJ Indexes might be reluctant to add a stock with such a low price.

GOLDMAN SACHS (GS.N)

Share price: $143.56 Market Cap: $72.2 bln

One of the most robust U.S. financial institutions.

However, the earnings potential in investment banking is under scrutiny. Now that Goldman has become a bank holding company, it would be adding to a crowded sector in the Dow, one that already includes Bank of America (BAC.N), JP Morgan Chase (JPM.N) and Citigroup.

GOOGLE INC (GOOG.O)

Share price: $413.36 Market Cap: $130.6 bln

A popular possibility, but Google's price is almost four times that of the index's costliest current component, and the Dow is a price-weighted index. It also has a short history as a company.

HONEYWELL INTERNATIONAL (HON.N)

Share price: $32.49 Market Cap:$24.2

The index committee could decide to take a step back in time and revive Honeywell International, which was once a part of the Dow. The diversified manufacturer could be attractive as it would fill a similar sector to GM.

MONSANTO CO (MON.N)

Share price:$80.82 Market Cap:$44.1

Monsanto, the world's largest seed company, could be used to represent the agriculture sector, which has grown with increased demand from emerging countries. However, the global economic slump has put a damper on the industry and prices have fallen.

NIKE INC (NKE.N)

Share price: $56.46 Market Cap: $27.4 bln

Nike could be a pick as it is "an interesting worldwide recognizable name," Robert Pavlik, chief market strategist at Banyan Partners, said recently. It would also fit the index's penchant for adding unexpected names, such as Kraft. But the company has a small market cap and there are no other apparel companies in the index.

NUCOR (NUE.N)

Share price: $43.38 Market Cap: $13.6 bln

After GM, Alcoa ranks last in market capitalization. If DJ Indexes elects to overhaul the average, perhaps by eliminating GM, Citigroup and Alcoa, the steelmaker could be a strong candidate from the basic materials sector. But the company is small, sporting a smaller market cap than even Ford.

THE TRAVELERS CO (TRV.N)

Share price: $39.74 Market Cap: $22.3 bln

This company was already listed in the index before it was purchased by Citigroup. It could be a late replacement for AIG.

WELLS FARGO (WFC.N)

Share price: $24.30 Market Cap: $114.3 bln

There is something to be said for surviving the financial meltdown, and Wells is now one of the largest financials, surpassing Citigroup and Bank of America in market cap. But it is unlikely to be added unless one of the other banks is removed.

(Additional reporting by Rodrigo Campos; Editing by Kenneth Barry)

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