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Will Apple Juice Tech in the Dow?

The Exchange

Will Apple (AAPL), the largest company in the world by market cap, at long last join the Dow Jones Industrial Average later this year?

The speculation is again brewing and has sparked more discussion about what it could mean for the stock and the index.

A recent research note from Bernstein analyst Toni Sacconaghi restarted the chatter about Apple -- the only company with a market cap above $215 billion that pays a dividend and that isn't already a component of the Dow -- joining the index.

Apple may be toying with the idea of a stock split in order to finally be listed on the index, and such a change may come in the next six to 12 months, according to Sacconaghi.

Tech is under-represented in Dow vs. S&P 500, accounting for 17.3% of the weighting in the former and 19.8% of the weighting in the latter, data from each index shows. "This disparity between Tech weighting in the Dow and S&P 500 leads us to believe the Dow is likely to add more Tech stocks, and that Apple would be a primary candidate if the company split its stock," Sacconaghi wrote.

Bespoke Investment Research co-founder Paul Hickey says that given Kraft's (KFT) plans to split up its snack food and grocery business later this year, it's likely the stock will be removed thereafter, opening the door for a new component -- possibly Apple.

Talk about Apple joining the Dow has been bubbling for years. The impact to the index would be substantial. USA Today, citing Hickey, pointed out in May that if Apple had been added to the Dow in June 2009, the average would be about 2,500 points higher, and well above its all-time high.

Just how much sway would Apple have? Stocks in the Dow are weighted according to price, not market cap -- this is where the split comes in.  If Apple were to be added to the Dow at its current price, it would account for more than a quarter of the entire index. Bespoke breaks down how different splits would affect Apple's weighting in the Dow if the stock replaced Kraft:

  • 2-for-1 or 3-for-1: Apple would still be the most heavily weighted Dow stock, with weightings of 15.4% and 10.8%, respectively.
  • 4-for-1: It would command an 8.3% weighting, putting it in second behind IBM (IBM) at 10.7%.

The most likely scenario is that Apple would split by just enough to be reasonable and still hold the largest spot in the index -- or in other words, by no more than 3-for-1 --  says Hickey.  It makes sense that Apple would maintain the commanding position, considering it has the largest market cap of any company in the world. "They will go in on their terms," he says.

Notably, anything below a 4-1 split would make the Dow quite top and tech heavy, says Hickey:  Apple and IBM would have a weighting nearly equal to the weighting of the bottom fourteen components combined.

Under the scenario of the addition of Apple after a 3-1 split, tech would account for 26% of the index by weight. This would affect other sector weightings -- for instance, energy (Chevron (CVX) and Exxon Mobil (XOM)) account for 11.23%, and that would of course decline.

After rising 2% on Tuesday, the stock was down 0.5% in recent trading Wednesday, at $607.85.

Does the Dow need more tech? Is Apple the right recipe? Let us know what you think in the comment section below!