Dow index adds Bank of America, Chevron

By Herbert Lash

NEW YORK (Reuters) - The Dow Jones industrial average .DJI is adding Bank of America Corp (BAC.N) and Chevron Corp (CVX.N), the first change to the blue-chip stock index in almost four years, Dow Jones & Co said on Monday.

Altria Group Inc (MO.N) and Honeywell International Inc (HON.N) will be dropped from the 30-member index, the oldest and single most-watched gauge of stock performance in the world. The changes take effect on February 19, Dow Jones said.

The planned spin-off of Philip Morris International Inc from Altria, which will leave it a purely domestic tobacco company, prompted the change in the Dow's make-up, said Marcus Brauchli, managing editor of The Wall Street Journal.

The Dow's composition is determined by editors of the Journal, which is published by Dow Jones, a unit of News Corp NWSa.N.

The change is the first in the 111-year-old index since April 2004, when three stocks were replaced.

The addition of Chevron makes sense because the Dow was light on energy at 5 percent compared with the broader Standard & Poor's 500 Index at 12.5 percent, said Chris Orndorff, who helps oversee $50 billion in assets as managing principal at Payden & Rygel Investment Management in Los Angeles.

Similarly, the addition of Bank of America makes sense because the Dow was underweight financials at 10 percent, versus 18 percent for the S&P 500, Orndorff said.

"With respect to the fundamentals, there is not going to be a dramatic change," he said. "So I don't see the DJIA suddenly outperforming the S&P 500 because of the changes."

Few investors build portfolios based on the Dow and in contrast to the moves that occur when the S&P 500 is modified, the change is unlikely to have a dramatic effect on the price of the stocks leaving or entering the index, Orndorff said.

"What the Dow does is it gives everyone a quick shorthand of what the markets are doing," said Mark Coffelt, president and chief investment officer at Empiric Funds in Austin, Texas.

The decision to drop Honeywell and Altria is unusual because the two stocks have performed well recently. Previous changes often marked the departure of stocks in decline at the time, such as Eastman Kodak, International Paper, Goodyear, Union Carbide, Sears, Bethlehem Steel and Woolworth.

"We were surprised by the criteria used in making today's decision," Honeywell said in a statement. "Our stock price was up 36 percent last year, making Honeywell the Dow Jones industrial averages' top performing stock in 2007."

Since 2003 Honeywell said sales have grown 11 percent on a compounded annual basis, and net income is up 17 percent.

Honeywell is being dropped because it is the smallest of the industrials in terms of profit and revenue, Dow Jones Indexes said. Chevron has been in the Dow twice before.

The additions recognize trends within the U.S. stock market, including the continued growth of the financial service industry as well as the oil and gas industry due to its growing importance to the world economy, Dow Jones Indexes said.