Facebook is Dow Jones’ $323 bn Omission
Facebook is larger than 27 of the 30 members of Dow, but can’t find a place
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.”