Amazon and Alphabet may be nearly five times the size of Oracle, but Oracle has a better chance of joining the Dow club
United Technologies Corp.’s plan to separate into three companies acted as a reminder, that the U.S. economy and the stock market are changing, and nothing lasts forever.
The breakup of the industrial conglomerate means the venerable Dow Jones Industrial Average DJIA, +0.57% will likely eventually lose another of its longest-tenured members, after General Electric Co. GE, +0.67% left earlier this year and as the “DuPont” names are likely to leave some time next year.
United Technologies Corp. UTX, -2.05% said late Monday, that with the completion of the Rockwell Collins acquisition, it plans to spin off its Otis escalators and elevators division and Carrier building systems businesses some time in 2020, leaving UTC as just an aerospace company. With aerospace giant Boeing Co. BA, +1.76% already a Dow member, it’s unlikely UTC will remain within the so-called blue-chip barometer.
Earlier this year, DowDuPont Inc. DWDP, -1.50% announced details of its plan to separate into three companies, which was expected to be completed by June 2019, which is likely to result in a Dow exit.
UTC has effectively been a Dow member as early as August 1933, when it entered as United Aircraft, and continuously since March 1939. It’s Dow membership changed to United Technologies Corp. in April 1976 after the company changed its name a year earlier.
Du Pont entered the Dow in November 1935, with its name changing to DowDuPont in September 2017 after the completion of the “merger of equals” between Dow Chemical Co. and DuPont & Co.
As investors begin the process of contemplating which company the keepers of the 123-year old index pick to replace those that will eventually leave, there are some hard rules to keep in mind, as well as some subjective and unwritten criteria, that could exclude some household names in their current forms.
Among the hard rules, the universe of eligible companies include those in the S&P 500 index SPX, +0.21% according to S&P Dow Jones Indices, which means they have to be domiciled in the U.S. In addition, companies can’t enter the Dow industrials if they are classified as transportation or utilities companies, based on the Global Industry Classification Standard’s sector guidelines.
For some of the subjective criteria: “While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors,” S&P Dow Jones Indices said.
The Dow keepers also said a “plurality” of a company’s total revenue should be derived from the U.S. for it to be eligible, and they also consider maintaining “adequate sector representation” with their choices.
Then comes the unwritten rules.
Since the Dow is a price-weighted average index, meaning the index’s price is influenced by a component’s stock price and not its market capitalization, the Dow keepers said the range of prices among its 30 constituents matter. David Blitzer, chairman of the index committee at S&P Dow Jones Indices, told MarketWatch last year: “We prefer that the ratio of highest to lowest price to be less than 10-to-1.”
Currently, with Boeing’s stock trading Tuesday at roughly $317 and Pfizer Inc. shares PFE, +0.74% at around $44, the ratios stands at about 7.2 to 1.
So even though Amazon.com Inc. AMZN, +1.62% the third-largest U.S. company by market cap, and Google parent Alphabet Inc. GOOGL, -0.50% the fourth largest, meet the hard and subjective criteria, their current high stock prices preclude them from joining the Dow club.
Based on current prices, Amazon would have to enact a stock split of at least 4 to 1 to meet the minimum requirement and Alphabet would have to split its stock by at least 3 to 1.
There’s more. Although paying a dividend isn’t a requirement, all the current Dow members pay one, with implied dividend yields ranging from a low of 0.74% for Visa Inc. V, +1.45% to International Business Machines Corp.’s IBM, +0.41% high of 5.23%.
“In my memory, [paying a dividend is] not an issue that has come up,” Blizter told MarketWatch last year. “We haven’t seriously looked at a candidate that did not pay a dividend.”
Amazon and Alphabet don’t, and have never, paid a cash dividend to shareholders. By the way, Warren Buffett’s Berkshire Hathaway Inc. BRK.B, +0.25% hasn’t declared a cash dividend since 1967.
That could always change, but those trying to predict which company will enter the Dow next will likely have a long lead time. Apple started paying a dividend in the fourth quarter of 2012 and implemented a 7-for-1 stock split in June 2014, before entering the Dow in March 2015.
Of the next largest S&P 500 companies by market cap that pay a dividend, and are not already in the Dow:
Bank of America Corp.’s BAC, -0.06% stock price is a bit low and it was just booted from the Dow in September 2013.
Wells Fargo & Co. WFC, -0.64% doesn’t necessarily have an “excellent reputation” after the recent scandals, and banks are already well represented with JPMorgan Chase & Co. JPM, -0.34% and Goldman Sachs Group Inc. GS, -0.26% GS, -0.26% GS, -0.26% Read more about Wells Fargo’s sales practice scandal and DoJ settlement over crisis-era mortgage loans.
AT&T Inc.’s T, -0.07% stock price is a touch low, and it was just removed from the Dow in March 2015.
Mastercard Inc. MA, +0.77% meets the criteria except for perhaps “sector representation,” given that Visa is already a member.
Then there’s business software and information technology company Oracle Corp. ORCL, -0.02% which satisfies the index committees hard, subjective and unwritten criteria.
Although the Dow already has a number of technology components, technology is still under-represented relative to the S&P 500. Technology made up 14.4% of the Dow as of Oct. 31, compared with 20.7% for the S&P 500.
When Walgreens Boots Alliance Inc. WBA, +0.07% replaced GE, after a 111-year run within the Dow, Blitzer said “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.”
