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Standard & Poors Corp. in New York is dropping the seven non-American companies from its S&P 500 Index and replacing them with U.S. companies that include Principal Financial Group, Des Moines, Iowa, and Prudential Financial, Newark, N.J.

Principal Financial (PFG), stock closed at $28.34 on July 10, up $1.34 and Prudential Financial (PRU) closed at $30.59, up 28 cents.

The move is expected to produce some buying power for the Index that has hit lows in October 2001 and again at press time. At press time on July 11, the S&P 500 had slid to $910.55.

S&P says the revision was made to make the Index “more consistent with its role as an index of large cap U.S. stocks and the U. S. segment of the S&P Global 1200 Index.

“The seven non-U.S. companies currently in the S&P 500 will be removed from the Index because they are not U.S. companies and, therefore, do not meet the current criteria for selecting these companies.”

Five of the companies that were removed from the Index are Canadian and two based in the Netherlands.

They are Alcan Aluminum; Inco; Royal Dutch; Unilever; Nortel Networks; Placer Dome; and Barrick Gold. Royal Dutch and Unilever are based in the Netherlands.

In addition to Principal Financial and Prudential Financial, the companies being added are United Parcel Service, Goldman Sachs, eBay, SunGard Data Systems and Electronic Arts.

Bear Stearns, New York, is continuing to rate the Principal “attractive” and Prudential “neutral.”

In a press release Bear Stearns says that the “wild card in PRUs upside is that many investors said that they have already purchased the stock in anticipation of the S&P 500 addition.

“So now that PRU is going to be included, the question is whether the stock will be able to attain the full benefit of being added to the Index, as many investors have planned to sell the stock on this news.”

Bear Stearns quantitative strategist Wing Chow says the move “will certainly make these stocks more volatile.”

“From an indexers perspective, some say this makes the S&P a better index because these are the real U.S. companies, so this will make it a cleaner index,” Chow says.

S&P says now is a good time for this move because turnover is at an eight-year low.

“Turnover is a concern for index investors because high turnover leads to higher trading costs and, in some cases, creates capital gains and tax liabilities for taxable investors,” the company says.

Another factor in determining the timing of the change is recent and expected initial public offerings, including insurance company demutualizations.

“Currently there are an unusual number of large companies eligible for inclusion in the S&P 500.

“There are four relatively recent IPOsall of the companies being added now would have been added to the S&P 500 over the next few months in the course of routine Index changes,” the S&P says.

Expected market events, holidays and other factors were also reviewed in order to determine the timing for this change, S&P says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.