Face­book is Dow Jones’ $323 bn Omis­sion

Face­book is larger than 27 of the 30 mem­bers of Dow, but can’t find a place

The Economic Times - - Markets: Beating Volatility -

New York: It’s the sixth-largest US com­pany, the fastest ever to reach $250 bil­lion in value, with rev­enue that has quin­tu­pled in four years. And yet Face­book isn’t in the Dow Jones In­dus­trial Av­er­age. Why not?

The 12-year-old so­cial net­work is get­ting harder for the Dow’s over­seers to ig­nore – an ele­phant in the room af­ter adding al­most $100 bil­lion in cap­i­tal­iza­tion since the av­er­age’s last reshuf­fling. At $323 bil­lion, Face­book is larger than 27 of the 30 Dow mem­bers and, aside from Al­pha­bet and Berk­shire Hath­away, the big­gest omis­sion. Add to that a di­gestible share price that would avoid the dis­tor­tions that keep Google's par­ent and Ama­zon.com from be­ing added.

“Face­book is sort of star­ing at you like, 'Why isn't that in there?"' said Richard Moroney of Hori­zon In­vest­ment Ser­vices LLC in Ham­mond, In­di­ana. "It's the leader in its in­dus­try, maybe it's ex­pen­sive and it's a stock peo­ple are di­vided on whether it's re­ally worth that price, but it's not ridicu­lous any longer."

At the same time, bar­ri­ers ex­ist that could be in­sur­mount­able, il­lus­trat­ing the chal­lenges over­seers face in de­cid­ing how soon to bless an in­dus­try such as so­cial me­dia. Com­pared with other mem­bers Face­book is young with rel­a­tively low rev­enue and twice the val­u­a­tion of other con­stituents. Its dual class struc­ture an­noys some governance ex­perts. Be­sides that, the Dow al­ready has a heavy weight­ing in tech, and might be bet­ter off wait­ing for Al­pha­bet or Ama­zon to split their shares be­fore ad­just­ing it.

Cre­ated in 1896, the price-weighted Dow av­er­age is in­tended “to pro­vide a clear, straight­for­ward view of the stock mar­ket, and, by ex­ten­sion, the US econ­omy,” ac­cord­ing to the S&P Dow Jones Indices web­site. Some crit­ics per­ceive the in­dex's over­seers as old fash­ioned, pre­fer­ring com­pa­nies that make phys­i­cal goods over those in the so­called “new” econ­omy, and say they're of­ten late to change.

“The own­ers may be a lit­tle gun­shy – their changes in the past 15 years have been poorly timed from an in­vestor’s per­spec­tive,” said Moroney, who also ed­its the Dow The­ory Fore­casts news­let­ter. Ap­ple, the world's largest com­pany, was added only a year ago, af­ter its stock peaked and un­der­went two splits. Mean­while, the own­ers have let strug­gling mem­bers try to right them­selves be­fore re­mov­ing them, he said.

Face­book, which went pub­lic in May 2012, would be the youngest mem­ber of the gauge, with a short- er pub­lic ten­ure than Visa With 2015 fis­cal year rev­enue of $17.9 bil­lion, it would be the sec­ond-small­est com­pany by that mea­sure, ahead of Visa. The world’s largest pay­ments net­work went pub­lic in 2008 and was added to the Dow five years later. At 88 times earn­ings in the last four quar­ters and 36 times an­a­lyst es­ti­mates for 2016, its val­u­a­tion isn't for the faint of heart. The clos­est cor­rel­a­tives are Visa, which trades on those bases at mul­ti­ples of 35 and 28, re­spec­tively, and Chevron, at 28 and 67.

David Bl­itzer, chair­man of the S&P Dow Jones Indices in­dex com­mit­tee, de­clined to com­ment about the pos­si­bil­ity of Face­book’s in­clu­sion. Com­mit­tee mem­bers con­tin­u­ally mon­i­tor the ma­jor US com­pa­nies and meet twice a year, most re­cently in March, he said. “When we meet and when we do some­thing are un­re­lated,” Bl­itzer said. "Most of the changes are driven by some sort of cor­po­rate event.”


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