Will Google Become a Contender in the Dow Jones?
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The Evolution of the Dow Jones Industrial Average
The Dow Jones Industrial Average (often referred to simply as "the Dow") has a storied history, having seen only 55 changes in its over 120 years of existence. This index, which tracks the performance of just thirty significant US companies, is considered a benchmark for the health of the economy. The companies included are viewed as vital contributors to the economic landscape, and the index is periodically updated to reflect the current market dynamics. When a new company is added, another must exit.
How the Dow Functions
The Dow is a price-weighted index, meaning that companies with higher stock prices have a greater influence on the index's overall value. This structure emphasizes the importance of each company's stock price relative to the index's total value. While there are no strict criteria for inclusion, companies typically need to meet certain criteria:
- Be a US-based company
- Be listed on either the NYSE or NASDAQ
- Have a significant impact within their sector
- Represent a meaningful portion of the US economy
- Play a critical role in contemporary society
- Have a stock price that is suitable for a price-weighted index
Why Google Might Join the Dow
On February 1, 2022, Google (GOOG) announced a 20-for-1 stock split, positioning its stock price within the range suitable for the Dow. The price of Google shares fluctuated between $45 and $467, closing at $2,609.35 on February 18, 2022. When divided by 20, this results in a price of approximately $130.47—well within the Dow's typical range.
Apple's inclusion in the Dow followed a similar path after a stock split aligned its price with other Dow members. In 2021, Google's revenue exceeded $257 billion, dwarfing IBM's (an existing Dow member) revenue of over $57 billion. This suggests that Google plays a significant role in the US economy, meets the eligibility requirements, and is influential in the Communication Services sector.
The Impact of Joining the Dow
When a company is added to the Dow, mutual funds that track the index are required to purchase its stock, often leading to a price increase due to heightened interest. I examined this trend with recent additions like Salesforce (CRM), Amgen (AMGN), and Honeywell (HON), which joined the Dow on August 31, 2020, following an announcement on August 24. Their stock prices did experience gains, especially in the week following the announcement.
The Ripple Effect of Exiting Companies
Companies that are removed from the Dow, such as Exxon Mobile (XOM), Pfizer (PFE), and Raytheon (RTX), tend to see declines in their stock prices. Interestingly, the drop is often less severe than anticipated. Fast forward to today, and those previously exited stocks have made notable gains since their removal.
Looking Ahead
As I monitor the potential changes within the Dow, I am inclined to consider purchasing stocks of companies that are removed, particularly during price declines. The decision of the Dow committee to remove a company does not always translate to long-term negative impacts on stock prices.
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Disclaimer: The information presented in this article is for educational purposes only and should not be construed as financial or legal advice. It is advisable to consult with a financial professional before making investment decisions.