On Jun 19, S&P Dow Jones Indices, a division of S&P Global, announced the departure of the beleaguered conglomerate General Electric Co. (GE - Free Report) from Dow 30. Notably, GE will cease to be part of this closely watched index of the U.S. stock markets from Jun 26. The drug store chain Walgreens Boots Alliance Inc. (WBA - Free Report) will replace GE in the 30-stock blue-chip index.
It is to be noted, the Dow was formed in 1896 and GE is one of the 12 original members of the index. It has been a continuous member since 1907. GE’s removal from the elite Dow 30 index reflects the tectonic shift in prominence of companies in U.S. economy.
The traditional industrial and metal companies have taken a backseat in the economy while financials, healthcare, technology and consumer staple and discretionary companies have emerged as the front runners. Both GE and Walgreens carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Why GE Gets Booted From Dow 30?
GE, the 126 year old industrial conglomerate, has been struggling in several key industrial markets in recent years. The company is aggressively cutting costs and selling businesses. It has even replaced its CEO, slashed thousands of jobs and is unsure about its capability to pay dividend in 2019.
In 2017, the stock was the worst performer of the Dow 30 index. It has lost 26% in the first six months of the year and 55% in the past 12 months. Given the fact that the Dow 30 is a price-weighted index, GE’s current stock price of $12.95 represents less than 0.5% of the overall index.
The company is now the sixth smallest member of the Dow 30 as per market value, and the lowest in terms of stock price. Consequently, GE bears virtually on influence on the price-weighted Dow 30 index at present.
Why has Walgreens Been Selected?
As a leading drug store chain, Walgreens will more accurately represent the importance of consumer products and healthcare industries in the U.S. economy. Notably, the consumer staple industry has been one of the worst performers in 2018. The stock price of Walgreen’s is down 11% year to date and declined about 19% over the last 12-months.
However, the important fact is that based on the closing price of Jun 19, Walgreens’ shares would rank as the seventh-least-influential within in the Dow 30 while GE was the least influential stock.
Consequently, it is likely that Walgreens will outperform GE when fund managers managing Dow 30-based funds will buy shares of Walgreens in order to restructure their funds to reflect the index’s new composition.
Will the Change Make Dow 30 More Attractive?
According to several industry experts, the Dow 30, the so-called blue-chip index does not exert the same influence as it used to till 1990s. According to Lipper data, nearly $20 billion is invested in exchange traded funds tied to the Dow 30 while ETFs that tracked the benchmark S&P 500 index received more than $380 billion in investments. Consequently, replacement of GE by Walgreens will not have any influence in the market.
However, a closer look will reveal some interesting pictures. The GE/Walgreens replacement will be the first shake-up to the Dow 30 since 2015, when Apple Inc. (AAPL - Free Report) replaced AT&T Inc. (T - Free Report) . However, that was a replacement within the technology sector.
The GE/Walgreens replacement will reduce the weight of industrial sector within the index and increase the weight of the consumer goods sector. This will change the most important divisor of the Dow 30.
Notably, the value of the index is determined by calculating the sum of the share price of its members using the divisor. Consequently, a restructured Dow 30 will more accurately reflect market sentiments.
The chart below shows price performance of General Electric and Walgreens year to date.
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