Alcoa Inc. (AA)’s speculative-grade credit ranking at Moody’s Investors Service makes it only the second junk-rated Dow Jones Industrial Average company in at least three decades. It took four years for the first to be ejected.
The New York-based aluminum producer was lowered last week by Moody’s, following General Motors Corp. as the only Dow member below investment grade since at least 1980, according to Howard Silverblatt, an analyst at S&P Dow Jones Indices. While the guidelines don’t mention debt ratings, Dow companies become vulnerable when their finances deteriorate, says Richard Moroney, editor of Dow Theory Forecasts newsletter.
Alcoa shares have declined 67 percent in the past decade through yesterday, leaving the company with the lowest share price and market value in the Dow, as surging aluminum production in China led to a supply glut. While S&P Dow Jones says inclusion in the average is not governed by quantitative rules, the index provider prefers “sustained growth.” Alcoa’s revenue has declined for four straight quarters and 2012 net income was less than a tenth what it was five years earlier.
The junk rating “is one more chink in the armor in terms of Alcoa fitting in there,” Moroney, who manages $175 million at Hammond, Indiana-based Horizon Investment Services, said in a phone interview last week. In the case of GM, the index provider “didn’t do anything for a long time. It seemed like GM was not a blue chip, but it’s still a bellwether. It’s hard to say the aluminum industry is truly a bellwether. I do think once they make a move, Alcoa will be gone.”