Dow Jones Industrial Average Faces Major Changes Again

The Dow Jones Industrial Average (DJINDICES: ^DJI) is experiencing its third significant reshuffle in five years. In 2020, Honeywell International, Salesforce, and Amgen replaced RTX (formerly Raytheon Technologies), ExxonMobil, and Pfizer. Earlier this year, Amazon took the place of Walgreens Boots Alliance. Now, on Friday, November 8, Nvidia will substitute for Intel, and Sherwin-Williams will fill the spot currently held by chemical corporation Dow.

These changes within the DJIA indicate that further adjustments may be on the horizon. This has led many to speculate which companies might be next. For instance, could Walt Disney (NYSE: DIS) be in danger of being replaced? If so, could Meta Platforms (NASDAQ: META) or Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) step in as potential candidates to take its place?

Image source: Getty Images.

Understanding the Changes in the Dow

The Dow encompasses 30 different components that represent 11 sectors of the stock market. Over time, technology has increased its share of the U.S. stock market’s overall value, making the Dow less focused on traditional industries than it once was.

Changes to the DJIA often occur when a company falls behind in its industry or significantly underperforms the index. Since the Dow is a price-weighted index, it is affected more by a company’s stock price rather than its market capitalization. For instance, five years ago, UnitedHealth Group‘s stock was about $250, Goldman Sachs stood at $220, and Microsoft was approximately $145. Their strong price increases, coupled with no stock splits, have led them to make up over 23% of the current index.

The median stock price of a Dow component is around $200, with UnitedHealth peaking at $567 and Intel currently at the lowest with a stock price of just $23.30. Companies that consistently underperform often find themselves removed from the index.

For example, when RTX, Pfizer, and ExxonMobil left the index on August 31, 2020, they had all faced significant losses over five years: ExxonMobil dropped 46.9%, RTX gained only 6.2%, and Pfizer improved just 17.3%. At that time, their stock prices were under the $61 mark, well below the average. Walgreens has seen considerable drops too, recently hitting a 25-year low before Amazon replaced it.

Currently, Disney’s stock price is about 22% off its 10-year low (recorded on October 4, 2023), reflecting its struggles. While it ranks 23rd among Dow constituents, recent improvements in its streaming service and successful films, such as Inside Out 2, alongside thriving parks, suggest that it may not be in immediate danger of being dropped. However, should the streaming service face challenges and park revenues decline, its position will be reassessed.

Who Might Be Next in the Dow?

Both Alphabet and Meta Platforms could be considered overdue for inclusion in the Dow, as the communications sector now makes up 9.1% of the S&P 500, ranking as the fourth-largest sector. Currently, the only communications companies represented in the Dow are Disney and Verizon Communications (NYSE: VZ), which together account for around 2% of the index. This lack of representation could lead to a change.

While both Alphabet and Meta have similarities, they also differ significantly. Meta is known for platforms like Instagram and Facebook and has developed a research arm focused on the metaverse and AI. In contrast, Alphabet encompasses Google, YouTube, and other services, making it less about social media and more about diverse offerings, including cloud computing. Bringing Alphabet into the Dow would ensure that all major cloud players – AWS, Microsoft Cloud, and Alphabet – are represented.

The recent stock split by Alphabet in 2022 and its price of around $170 align well with the Dow’s composition. On the other hand, if Meta were to conduct a 4-for-1 stock split, it would bring its shares down to about $143, which would also fit nicely. Despite this, Alphabet’s diverse portfolio and experience make it the likely front-runner for Dow membership.

Potential replacement candidates could include Verizon and Cisco Systems (NASDAQ: CSCO) as they both have lower stock prices, making them weaker components in the index. Both have struggled recently—Cisco has only increased 18% over the last five years, while Verizon’s stock has declined by 31%.

Verizon currently provides a substantial dividend yield of 6.6%, but since Sherwin-Williams, which yields 0.8%, became part of the index, it appears growth potential is becoming more significant than dividend returns in determining new inclusions.

Replacing Cisco with either Alphabet or Meta would mark a sector shift, as Cisco belongs to the tech sector. However, the index has made similar adjustments in the past, such as Salesforce replacing ExxonMobil.

Evolving Market Trends

The Dow’s recent shifts reflect a broader move from value stocks towards growth-oriented companies, indicating a shift in investor sentiment and market priorities.