What Now for the Dow

After representing the U.S. stock market for more than a century, the Dow Jones industrial average isn't going away. Perhaps it should. Despite the occasional injection of new blood (Cisco Systems and Travelers replaced General Motors and Citigroup, respectively, this year), the 30 Dow stocks still contain too many remnants from a bygone industrialized economy. In addition, its members are usually past their prime growth years (although they make up for it in size and financial strength). Worse, from a practical viewpoint, the 30-stock index uses an anachronistic, price-weighting scheme rather than weighting results by a firm's market value, as most modern indexes do (for more on the Dow's shortcomings, see Why the Dow Is a Dumb Index).

Still, its member companies are influential and widely held. Below is our take on each of them, including our traffic-signal-style ratings: green for buy, yellow for hold and red for sell. (Prices are as of August 7.)

3M (MMM), $74.10 at the close September 24

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The time to buy 3M was back in March, when the stock traded for a ridiculous $41 -- ridiculous because 3M is one of the most dependable U.S. manufacturing businesses ever, and buying it for ten times estimated 2009 earnings was a slam-dunk. Although 3M reported a 16% decline in second-quarter earnings, it raised its forecast for 2009. Now the stock is merely a good long-term buy.

ALCOA (AA), $13.51

Shares of the aluminum producer are just where you want them to be when buying into a highly cyclical business -- off 71% from their peak and close to rock bottom. But patience is required. Gains will come as the economy recovers. Analysts expect a $1.01-a-share loss this year before black ink arrives in 2010.

AT&t (T), $27.03

Thanks in part to its exclusive iPhone deal, AT&T's wireless business is doing well, even as the wired-phone business continues its inevitable decline. Although we worry about cutthroat competition and the threat of tougher government regulation, the $1.64 dividend looks safe and very attractive. The stock yields 6.3%.

AMERICAN EXPRESS (AXP), $33.85The credit-card issuer is in relatively good financial shape compared with other financial firms. But job losses, chastened consumers and new federal regulations all pose big obstacles to growth. In addition, the shares have tripled in value since March, leaving them well beyond bargain territory.

BANK OF AMERICA (BAC), $16.98

Yes, BofA posted a second-quarter profit of $3.2 billion, helped by one-time gains from asset sales and government guarantees that allow it to borrow cheaply. But not enough has been done to purge its balance sheet of the problem loans, which are an ongoing threat to profits. Until they're gone, avoid the shares.

BOEING (BA), $51.79

Whoever named Boeing's next big plane the Dreamliner either had a great sense of irony or had no clue. The 787 has been plagued by delays, cancellations and cost overruns. Still, the company has a backlog of orders for 850 planes. Boeing's defense business -- half of revenues -- remains strong, and second-quarter earnings were up 22% from a year earlier.

CATERPILLAR (CAT), $51.85

The heavy-equipment maker needs a strong global economic recovery to be back on top. For now, Caterpillar is battening down the hatches -- laying off workers and streamlining operations -- to keep its strong cash flow from flagging. This year it posted its first quarterly loss since 1992. Caterpillar is a first-class company that will roar back -- eventually.

CHEVRON (CVX), $70.71

The California-based oil company offers financial strength, a generous, $2.72 dividend (resulting in a 3.9% yield at the current price) and a number of promising oil-and-gas exploration projects around the globe that have recently come on line, or soon will. Chevron shares are more closely tied to oil-price movements than those of ExxonMobil, but they're also cheaper.

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CISCO SYSTEMS (CSCO), $22.65

The computer-networking king sits atop a mountain of cash ($34 billion), and it reigns in the markets for routing and switching equipment. Revenues should start expanding again next year, but the stock, at 17 times year-ahead earnings estimates, isn't cheap. Look for Cisco, a serial acquirer, to go shopping again to bolster growth.

COCA-COLA (KO), $52.34

Consumers may be struggling, but people the world over can still scrounge some change for a Coke and other soft drinks peddled by Coca-Cola. Its second-quarter results showed that volumes (basically bottles sold) rose 4%. But the big news was that volume soared 33% in India and climbed 14% in China. Earnings should rise modestly this year, more impressively next.

WALT DISNEY (DIS), $27.97

Theme-park revenues dropped 9% in Disney's third fiscal quarter, but parking yourself on the couch and watching sports is a recession-proof pastime. With ESPN channels booming (more than 70% of Disney's operating profits come from its media networks), the company is weathering the recession just fine. The price-earnings ratio of 15, based on estimated year-ahead profits, is well below historical levels.

DUPONT (DD), $32.27

This chemical maker is deep in the throes of a cost-cutting effort that should position it well for an economic recovery. But that recovery appears to be already built into the share price, which has risen 37% since early July. In addition, the company may be tempted to trim its rich, $1.64 dividend (the stock yields 5%) if things get worse before they get better.

EXXONMOBIL (XOM), $68.93

Whether oil prices are rising or falling, the well-managed, Texas-based oil giant is one of the safest ways to invest in energy. It has the size and skill to remain at the front of the pack. Its share-buyback program may be running out of steam. But the $1.68 dividend, which results in a 2.4% yield at the current share price, is safe and is raised regularly.

GENERAL ELECTRIC (GE), $16.58

Infrastructure and clean energy provide an enormous opportunity for GE, which has interests in everything from wind-powered turbines to water-treatment systems. But we are uneasy about its financing arm, which accounted for 39% of operating profits last year. It suffers from the same bad-loan problems that plague banks.

HEWLETT-PACKARD (HPQ), $46.87

A weak job market and a steep decline in business spending have wounded the PC and printer maker. Fortunately, chief executive Mark Hurd is one of the best cost-cutters in the business. Last year's acquisition of EDS will boost HP's profile in information-technology services, which tend to be more stable than hardware.

HOME DEPOT (HD), $27.04

It's hard to imagine a worse retailing niche in a housing crisis than a home-improvement chain. Not surprisingly, sales in the first fiscal quarter fell by 10% from the year-earlier period. But management is trimming overhead and capital spending and keeping inventory lean. Earnings should bottom this year -- at $1.40 per share, about half the 2006 number -- and rise modestly next.

INTERNATIONAL BUSINESS MACHINES (IBM), $120.94

Any technology company that's been around since 1911 is doing something right. IBM, building on its powerful brand and strong customer relationships, has shifted its focus in recent years from hardware to software and services, which produce annuity-like revenue streams and carry higher profit margins. Abundant free cash flow allows Big Blue to boost dividends and shrink the share count each year.

INTEL (INTC), $19.54

The world's largest semiconductor company dominates the microprocessor business, which is starting to benefit from inventory replenishment in the computer industry following a prolonged slump. Intel has a strong balance sheet and pays a nice dividend (56 cents a year) for a tech company, but the shares, at 34 times estimated '09 earnings, are not cheap.

JOHNSON & JOHNSON (JNJ), $60.72

Venerable J&J resembles a diversified health-care mutual fund, with its strong positions in prescription drugs, medical devices, over-the-counter medications and other consumer products. With half of revenues coming from abroad, J&J is also geographically balanced. J&J, one of only six nonfinancial firms with a triple-A bond rating, generates copious amounts of cash and yields 3.3%.

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JPMORGAN CHASE (JPM), $44.37

JPMorgan suffered some scratches during the financial crisis but, unlike most other money-center banks, emerged largely unscathed under the leadership of CEO Jamie Dimon. The easy money has been made in the stock, which has surged 181% since March. But the bank is well-capitalized and will continue to pick up market share in lending and investment banking.

KRAFT (KFT), $26.38Earnings should hold steady in 2009 -- no mean feat given rising commodity costs and currency swings. Moreover, consumers are trading down from Kraft's high-priced brands, such as Oreo, to store brands. The 4% dividend yield helps, but until growth revs up again, we'd approach the stock with caution.

MCDONALD'S (MCD), $56.12

Good news: Sales at stores open at least a year rose 4.8% in the second quarter from the year-earlier period. Plus, McCafe coffee drinks continue to scald Starbucks, and consumers are trading down to Mickey D's bargain prices. Bad news: Earnings were nicked 9 cents a share because of a stronger dollar. Good news wins. Profits could climb 10% next year.

MERCK (MRK), $31.01

For a company that spends a lush 20% of sales on R&D, its labs have seemed unproductive. Perhaps the pending $41-billion acquisition of Schering-Plough will help, or maybe Merck's lab will pull a rabbit out of the hat. Otherwise, the stock's primary attraction is the 5.1% yield (although Merck hasn't boosted the payout in five years).

MICROSOFT (MSFT), $25.94

For the fiscal year that ended in June, Microsoft reported declining revenues for the first time in its history. It's too early to say whether the search alliance with Yahoo will yield results in the fierce competition with Google. But the upcoming launch of Windows 7, Office 2010 and new server software should help energize sales and profits.

PFIZER (PFE), $16.44

Revenue growth has been anemic for years, and Pfizer faces the expiration in 2011 of its U.S. patent on Lipitor, which accounts for a quarter of sales and profits. That expiration is concentrating the mind: Pfizer has 100 drugs in the research pipeline and is spending $68 billion to buy Wyeth. And the stock, which yields 4% and trades at eight times earnings, is cheap.

PROCTER & GAMBLE (PG), $57.84

Given its immensity -- the world's biggest consumer-products company generates annual revenues of about $80 billion -- P&G's growth rate has been impressive. Sales have climbed 9% annualized over the past five years, and earnings, 11.5%. But growth will stall in the fiscal year ending next June, with sales flat and profits down slightly. Longer term, the stock, which yields 3.1%, is a safe, if unexciting, bet.

TRAVELERS (TRV), $47.52

To its credit, the property-and-casualty insurer has mostly stayed out of the headlines, not easy for a company in the accident-prone financial-services industry. The company is generating 1% to 3% in additional insurance premiums each year. Growth is sluggish, but the stock, which trades at a discount to book value, is modestly priced and yields 2.6%.

UNITED TECHNOLOGIES (UTX), $62.34

The Hartford, Conn., conglomerate makes everything from elevators to helicopters. Two steady sources of business -- military orders and ongoing maintenance work -- keep profits stable during tough times. We like its diversified businesses, $58-billion backlog of orders, 2.5% dividend yield and reasonable share price.

VERIZON COMMUNICATIONS (VZ), $30.15

Like AT&T, Verizon is offsetting a declining land-line business with an expanding wireless business. Although Verizon's wireless network is superior to AT&T's by some measures, the company must share 45% of its wireless profits with the unit's co-owner, Vodafone. In addition, Verizon carries a much higher debt load than AT&T.

WAL-MART (WMT), $50.70The world's largest retailer hasn't missed a beat during the recession -- in fact, its low, low prices have made it a prime beneficiary of consumers' newfound frugality. The lion's share of Wal-Mart's growth will come from abroad. Analysts look for earnings to rise 4% this year and 9% the next.

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