Groucho Marx once famously said that he wouldn’t want to belong to any club that would have him as a member. Then again, he was a comic and not a CEO trying to earn or keep a spot on the Dow Jones industrial average.
For as corporate collectives go, there is nothing average about it. With just 30 stocks in its ranks, the Dow is about exclusive as it gets — and with apologies to Groucho, getting booted from this club is no laughing matter.
Just last month, that fate befell General Electric Co. (ticker: GE), marking another devastating tumble for the vaunted company co-founded by Thomas Edison and J.P. Morgan. While General Electric had suffered some tough breaks over the last decade, things were looking up not that long ago. Heading into 2017, GE boasted a monstrous market cap of $290 billion and had ambitious plans to streamline. The stock held steady if not spectacular at $31 per share, up a third from the previous year.
[See: 8 of the Best Stocks to Buy for the Rest of 2018.]
Then the year crashed to a disastrous end. GE cut its dividend for just the second time since the Great Depression — and not by a few mere pennies, but in half. While the company put on its bravest face and talked of turning things around, 2018 has been even less kind. GE’s departure, announced on June 19, meant farewell for one the Dow’s founding members and came just months after it announced lights out for its historic light bulb operation, a defining link to Edison’s legacy.
The stock? Now $13 a share. Market cap? Sliced to $113 billion. Oh, woe is GE.
But for all the prestige afforded a DJIA member, the question is this: How much does it matter, really? It’s a nice bragging right if you’re a beneficiary of the boot, and with a Dickensian name to boot: Walgreens Boots Alliance ( WBA) is the world’s largest drugstore chain and GE’s replacement. But its step up to the big stage was followed fast by a pratfall to make the Marx Brothers jealous.
Walgreens tanked 11 percent in three days. It marked the worst such debut in 10 years, moving one media outlet to dub WBA “dog of the Dow” (not to be confused with the 1991 “Dogs of the Dow” investment strategy).
That said, Walgreens isn’t going anywhere while GE just did. “The Dow matters and it matters more right now for GE than for Walgreens,” says Jason R. Escamilla, CEO of ImpactAdvisor in San Francisco. “Why? Because client perceptions matter.”
An 11 percent slide is forgivable compared to having your Dow membership revoked.
Yet as market metrics go, it might surprise you to find that for some, the Dow is no holy cow. Escamilla doesn’t care for it, even if some financial advisors do: “As a portfolio manager I completely ignore the Dow as a market measurement.”
What’s more, the Dow seems for some market mavens like an anachronism in this era of light-speed trades and artificial intelligence: an odd duck born in an era before airplanes.
[See: 9 Ways to Invest in Red-Hot Tech Stocks.]
Its roots date to 1885 when it was created by Wall Street Journal editor Charles Dow and his business partner, statistician Edward Jones. First formally calculated in 1896, the Dow included GE (then just four years old) and 11 other companies you’ve likely never hear of, unless the National Lead Co. or Distilling & Cattle Feeding Co. ring any opening or closing bells.
Today, 25 of the Dow’s 30 companies trade on the New York Stock Exchange. The oldest member title now belongs to Exxon Mobil Corp. ( XOM), introduced in 1928 as Standard Oil of New Jersey and originally a holding of billionaire John D. Rockefeller.
Even halfway around the world, the Dow gets a requisite amount of attention; news of GE’s departure wasn’t lost on overseas investment experts.
“We have witnessed the end of an era,” says Dale Gillham, an Australian financial investment expert and author of the upcoming book “Accelerate Your Wealth: It’s Your Money, Your Choice!”
And while GE is the last of the first Dow component companies, it certainly won’t be the last member to get the heave ho. Appropriately enough, this investment deck of cards has been shuffled 52 times over its history, with the likes of Eastman Kodak Co. ( KODK), Citigroup ( C) and Alcoa Corp. — now Arconic ( ARNC) — transitioning from active players to alumni.
Leaving truly equates to being cut from the team. By design, the Dow is a weighted average “designed to move higher and remove underperforming names in its self-interest,” says Raghee Horner, managing director, futures trading for Austin-based Simpler Trading.
So when a company like GE is cut, “fund managers and exchange-traded funds remove the name from holdings meant to reflect the Dow — while Walgreens Boots would, in this case, get a boost because of its addition to the Dow club,” Horner says.
Yet all the dire news of GE “ignores several other occurrences,” says Keith Baker, a CPA and professor of mortgage banking at North Lake College in Irving, Texas. For starters, “GE was removed from the Dow Jones index in April 1901 and wasn’t added back to until 1907. AT&T ( T) was dropped in 2015 and replaced by Apple ( AAPL); and AT&T was dropped in 2004 because of its restructuring and break-up.” Confusingly enough it was added back in 2005 after its former subsidiary, SBC Communications, bought it and rebranded the combined company as AT&T. All told, not so much a boot as a back-and-forth boot-scoot boogie.
Who will get investment’s big pink skip next? Not even Warren Buffett, the great Oracle of Omaha, knows. But in the milieu of Wall Street, where no prediction is certain, investors can bet on this: The Dow’s current congregation of hotshots, from 3M Co. ( MMM) to Walt Disney Co. ( DIS), will eventually give way to a generation of giants that haven’t even been born yet.
[See: 9 Investing Tips from Warren Buffett’s Playbook.]
“The current makeup of the Dow is vastly different to what it was 100 years ago,” Gillham says, “and will be different again in the next 100 years.”
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Booted by the Dow: What Does It Mean? originally appeared on usnews.com
