Composition Changes Prompt Another Look at the DJ Utilities Average
by Richard Evans
Effective May 12, 1997, The Wall Street Journal made several changes in the Dow Jones 15 utilities average, with six utility issues dropped and six replacements:
The purpose of the changes was to revitalize the Dow Jones utilities average by adding some of the more actively traded issues. One result was that the “more desirable” stocks added were higher-priced, $42.33, on average, while the “less desirable” stocks dropped were lower-priced, $24.92, on average (based on May 9 closing prices).
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The role of the utilities average was also discussed. The Wall Street Journal article noted that because utilities are big borrowers, they are interest-rate sensitive and therefore a leading indicator of interest rates, and, to some extent, a leading indicator to the overall market as well.
The debt-equity ratio for the utilities average is 103%. While a debt-equity ratio of 103% seems high, and maybe is significant, when compared to the average manufacturing company’s debt-equity ratio of 65%, the utilities’ debt-equity ratio is not so extraordinary. Nonetheless, swings in interest rates do enter the profit picture—and the stock price patterns—of utilities more than most other equities.
Utilities, since they offer above-average dividend returns and tend to be purchased by income-conscious investors, also will reflect the ebbs and flows of money returns. As interest rates rise, the payout on the utilities will become less attractive and prices will adjust downward, and vice versa.
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