The S&P Dow Jones Indices recently announced a significant shake-up for the Dow Jones Industrial Average. Three of the 30-strong indexes oldest constituents, oil major Exxon Mobil Corporation XOM, industrial conglomerate Raytheon Technologies Corporation RTX and drugmaker Pfizer Inc. PFE will be removed.
These stocks, in the meanwhile, will be replaced by cloud software provider salesforce.com, inc. CRM, biotech bigwig Amgen Inc. AMGN and another industrial multinational Honeywell International Inc. HON.
The changes will go into effect on Aug 31, before trading begins. The changes were prompted by Apple’s four-for-one stock split, which will substantially reduce the Dow’s tech-sector weighting.
It’s worth pointing out that companies’ weightage in other S&P indices are based on their market cap, however, in case of Dow, it is calculated according to the constituents’ share prices. Thus, an unprecedented rally among shares of Apple this year increased the iPhone maker’s weight in the blue-chip index to 12%. But the stock split will now reduce the iPhone maker’s weight in the index to around 3%.
Nonetheless, the inclusion of salesforce.com in the Dow indicates the growth in cloud computing amid the pandemic, while the elevation of Amgen highlights the rise of biotech. And for Honeywell, it is nothing but homecoming as the company was removed from the index way back in 2008.
By the way, removal of Exxon now just leaves only one energy company in the Dow, which is Chevron. Exxon was added to the Dow in 1928 when the index expanded to 30 stocks from 12.
Similarly, Raytheon Technologies’ history with the Dow dates back to decades. In 1930s, United Aircraft was added to the Dow. The company changed its name to United Technologies in 1975, and finally merged with Raytheon this year, and named it Raytheon Technologies.
Notably, the additions later this month will make UnitedHealth Group Incorporated UNH the largest component in the Dow, followed by The Home Depot, Inc. HD and Amgen.
But what does inclusion of stocks in the 124-year old equity benchmark mean? Historically, the stocks added to the index actually underperformed in the near term compared to the ones that have been removed, according to Dow Jones Market Data of the past 20 years.
For instance, in the last decade, stocks that were added gained 0.3%, while those removed soared nearly 10.4%. And if the time period is extended, since 1999, Dow additions have tanked 10.1%, while those removed in the same period declined a comparatively less-severe 2%.
Thus, the exclusions are certainly not bad news for Exxon Mobil, Raytheon Technologies and Pfizer. In fact, if we look at International Business Machines Corporation IBM, the picture will be even clearer. The company was removed from the Dow in 1939 and it didn’t make it back until 1979. And over those 40 long years, IBM outperformed the broader market by a large margin. And if IBM wasn’t out of the Dow for those 40 years, the index today would have been approaching the 60,000 mark!
However, salesforce.com is currently the only company that may defy this traditional logic. After all, the company is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for its products. Moreover, Salesforce’s diverse cloud offerings, clientele strength, strategic acquisitions and partnerships are key drivers.
What’s more, the San Francisco company reported second-quarter revenues of $5.15 billion on Aug 25, up from $4 billion in the year-ago quarter. Additionally, its net income for the said quarter came in at $2.63 billion or $2.85 a share, beating analysts’ estimate of 67 cents a share.
Shares of salesforce.com jumped 3.6% yesterday. To top it, its shares are expected to climb 18% in the next five-year period. The company currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
International Business Machines Corporation (IBM) : Free Stock Analysis Report
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
The Home Depot, Inc. (HD) : Free Stock Analysis Report
Pfizer Inc. (PFE) : Free Stock Analysis Report
Honeywell International Inc. (HON) : Free Stock Analysis Report
salesforce.com, inc. (CRM) : Free Stock Analysis Report
Amgen Inc. (AMGN) : Free Stock Analysis Report
Raytheon Technologies Corporation (RTX) : Free Stock Analysis Report
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