Dow Jones Utilities

Here we are going to discuss the final of the three famous Dow Jones Indexes - the Dow Jones Utilities Average.  With its humble beginnings back in January of 1929, the Utilities index is the youngest of the three averages.  And unlike the Industrials and Transportations Index, this one was not created by Charles Dow.

You see, Charles Dow was famous not only for creating the Dow Jones Indexes, but he was also the founder of Dow Jones and Company - owner of the Wall Street Journal and publisher of the index data.  Charles Dow passed away in December 1902, roughly 26 years before the first 18 companies that made up the Dow Jones Utilities Average were published by the Wall Street Journal.

History of the Utilities Index

While the Utilities Index may have started out with 18 member companies back in 1929, it only took six months for that number to rise to 20.  It stayed at 20 until June of 1938, when the number of member companies was reduced to 15 - the current number in the Utility's Average.

Unlike its bigger brother, the Dow Jones Industrials Average, the components of the Utility Average has been relatively unaltered.  In fact, most of the changes that have occurred in recent years are the result of mergers and acquisitions.

One bit of trivia surrounding the Utilities Index is that the original average included American Telephone & Telegraph Co.  It was later removed in 1938 and placed into the Dow Jones Industrial Average in March 1939.  The company it replaced?  Why that was good old International Business Machines.

Dow Jones Utilities Components

As previously mentioned, the Dow Jones Utilities Index includes 15 stocks or component companies.  Each of these companies is assigned a weight that is used along with the stock's price to calculate the Utilities Index.  For example, Exelon Corp has a weight of around 12%.  That means that approximately 12% of the movement in the index can be explained by the stock price of Exelon.

As mentioned in previous articles in this series, component weightings become important when a stock is replaced in an index - an event that does not happen very frequently - especially with the Utilities.  By using a component weight method, this allows for the replacement of a company in the index without the need to restate all of the historical price movements.

This feature adds to the overall stability as well as the long-term usefulness of the measure.  The stocks included in today's Utilities index, along with their weights appear in the following table:

Dow Jones Utilities 15 Components

The above weightings are as of September 2008.  You can also download a spreadsheet of the Dow Jones Utilities Average for free.

Dow Utilities and Interest Rates

One of the reasons market analysts follow the Dow Jones Utilities so closely has to do with its perceived relationship to interest rates.  According to the experts that study the averages, a rise in utility stock prices means that investors are anticipating falling interest rates, while a decline in these stock prices means that interest rates are rising.  There are two theories behind why this happens.

The first has to do with the amount of borrowing, or financial leverage, that utilities use to support all their capital investments.  When interest rates are declining, the interest expense on all that borrowing goes down and the profitability of utilities is enhanced.  This makes these stocks more attractive to investors.

The second theory that links the rise and fall of the Utility Average to interest rates has to do with the typically high stock dividends that utilities pay.  In fact, we recently reported that 73% of the Utility Index stocks were paying dividends over 3.25%, compared to just 37% of the Industrials Index.  When interest rates are falling, the dividend yields of the utilities become more attractive to those investors seeking a steady source of income, thereby driving up the price of utility stocks.

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