Only issue was ‘when’ GE would be booted from the Dow, not ‘if’
Worst performer for past two years
General Electric Co. suffered a crowning ignominy Tuesday as overseers of the Dow Jones Industrial Average kicked the beleaguered company out of the stock gauge it has inhabited for more than a century.
Once the world’s most valuable company, GE will be replaced by Walgreens
Boots Alliance Inc., the Deerfield, Ill.-based drugstore chain created in a 2014 merger. The change will take effect prior to the open of trading next Tuesday. Down 26 per cent, GE is the worst performer in the Dow in 2018, as it was last year, as well.
“It was an issue not of if, but when,” said Quincy Krosby, chief market strategist at Prudential Financial. “The GE that was dominant in the Dow in the ’70s and ’80s is no longer the same GE.”
The change means the last original Dow member has finally been removed from the benchmark formed in 1896, with GE joining the likes of Distilling & Cattle Feeding, National Lead, Tennessee Coal & Iron and U.S. Rubber. GE briefly left the index, but has been in it continuously since 1907.
“Since then the U.S. economy has changed: consumer, finance, health care and technology companies are more prominent today and the relative importance of industrial companies is less,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. Adding Walgreens makes the index “more representative of the consumer and health-care sectors of the U.S. economy.”
GE has also changed. It’s lost almost US$140 billion of market value in the last year, spurring a plan to shed $20 billion of assets in a bid to realign businesses and cut costs as the company grapples with debt challenges and flagging demand. Chief executive John Flannery, who took over for Jeffrey Immelt last year, said in May there is no “quick fix” to the company’s problems.
In Walgreens, the Dow gets something less than an investor darling. The stock fell in both 2016 and 2017 and is down another 11 per cent since December as the chain dealt with the competitive pressures plaguing most of the retail industry. One positive was probably its stock price: at around US$65, it won’t distort the Dow, whose members are weighted according to price rather than market capitalization.
The Dow’s weighting methodology effectively rules out inclusion of several of the largest companies in the world, among them Google parent Alphabet Inc. and Amazon.com Inc., whose shares trade above US$1,000. It may also be a mark against another technology company, Facebook Inc., which has occasionally been mentioned as a Dow candidate.
Tuesday’s switch de-emphasizes industrial companies in the Dow, currently the biggest industry group in the index at 23 per cent of its value, according to data compiled by Bloomberg. Walgreens is categorized as a consumer-staples company, a group that now only makes up 5.7 per cent of the Dow. Health-care companies are 13 per cent.
According to the index manager’s website, the Dow favours a company that “has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.” It also seeks to maintain “adequate” sector representation.
GE sank 45 per cent in 2017, compared with a 25-per-cent gain in the Dow, as it struggled with weak demand for industrial products from gas turbines to locomotives and oilfield equipment. Its shares fell as low as US$12.50 in premarket trading Wednesday, which would be its lowest closing price since 2009.
“We are focused on executing against the plan we’ve laid out to improve GE’s performance,” the company said in a statement. “Today’s announcement does nothing to change those commitments or our focus in creating in a stronger, simpler GE.”
GE has been by far the worst in the Dow for more than a year while contending with weak demand for industrial equipment and cashflow challenges. The troubles deepened in January with the news that U.S. securities regulators were probing the firm’s accounting.
Like GE, the Dow’s importance in markets has waned as institutional investors and exchange-traded funds migrated to broader, capitalization-weighted measures such as the S&P 500. Still, according to the S&P Dow Jones Indices website, about US$4.83 trillion is benchmarked to the gauge, with index assets making up $1.1 trillion of the total.
As for GE, “as much as it reflects on the stock price, it’s probably more significant for a retail investor than it is to institutional investors,” Nick Heymann, a William Blair & Co. analyst, said in an interview. He rates the stock outperform. “It’s still a member of the S&P 500. If it was to exit that, there would be a lot more material adjustment for professional portfolios.”