For nearly 128 years, the iconic Dow Jones Industrial Average (^DJI) has stood out as the most visible barometer of Wall Street’s health. Since its official inception on May 26, 1896, it’s grown from what had been a 12-stock index that predominantly featured industrial companies to one that now showcases 30 historically profitable, time-tested, multinational businesses.
It’s also an index that’s seen its fair share of modifications since the late 1800s. Excluding company name changes and mergers of then-existing Dow Jones components with other businesses (which may have also resulted in a name change), the Dow has undergone 51 changes since 1896. On Monday, Feb. 26, the ageless index will log its 52nd such change.
Welcome, Amazon! C’est la vie, Walgreens!
On Tuesday, Feb. 20, the S&P Dow Jones Indices, which oversees additions and subtractions to the highly followed Dow Jones Industrial Average, announced that, as of the start of trading on Monday, Feb. 26, pharmacy chain Walgreens Boots Alliance (WBA) would be getting the literal boot. Meanwhile, e-commerce kingpin Amazon (AMZN) will be taking its place.
The writing had been on the wall for some time that Walgreens, which was added to the Dow on June 26, 2018, would be getting the heave-ho. Unlike most major stock indexes that are weighted by market cap — i.e., bigger businesses exert greater influence on the point value of an index — the Dow is a share-price-weighted index. Put simply, companies with higher share prices matter more than those with lower share prices, regardless of market cap.
As of the closing bell on Feb. 20, 23 of the Dow’s 30 components had triple-digit share prices. Walgreens Boots Alliance had the lowest share price by a considerable amount — $22.31. Based on the Dow’s divisor (the figure used to convert share price into Dow points), Walgreens accounted for just 147 points out of the index’s 38,564 points.
While I believe Walgreens represents an intriguing and inexpensive turnaround candidate that has a multipoint strategic plan already in place, the Dow’s success hinges on not only having business diversity in the index, but also having outperforming companies represent the index. Walgreens and its poor stock performance simply didn’t cut it.
After conducting a 20-for-1 stock split in June 2022, Amazon put itself on the map as a logical candidate to join the prestigious Dow Jones Industrial Average. While it’ll help replace the retail aspect that Walgreens Boots Alliance brought to the table, Amazon will also provide clues on the health of the advertising market, as well as cloud spending.
The interesting thing about Amazon is that while it generates a lot of revenue from its leading e-commerce marketplace, the margins associated with online retail sales are very low. It’s the company’s ancillary operations — which include advertising services, subscription services (e.g., Prime), and cloud infrastructure leader Amazon Web Services (AWS) — that account for the lion’s share of its operating cash flow and net income.
In particular, AWS is Amazon’s workhorse. Even though AWS accounted for less than 16% of Amazon’s net sales last year, it generated $24.6 billion in operating income, compared to just $12.2 billion for every other business segment combined!
Despite having one of the largest market caps among publicly traded companies, Amazon will slot in as only the 17th most influential component of the Dow Jones Industrial Average, based on its closing price of $167.08 on Feb. 20.
Walmart gets a stock-split makeover
Amazon and Walgreens Boots Alliance switching places isn’t the only change being made to the iconic Dow come Monday, Feb. 26. Following the closing bell on Jan. 30, retail behemoth Walmart (WMT) announced that it would be enacting a 3-for-1 stock split, which would become effective at the start of trading on Feb. 26.
A stock split allows a publicly traded company to change its share price and outstanding share count by the same factor and has no impact on the company’s market cap or operating performance. It’s a purely cosmetic change designed to either make shares more nominally affordable for everyday investors, as with a forward stock split, or increase a company’s share price to ensure that continued minimum listing requirements for major stock exchanges are met, as with a reverse stock split.
Walmart’s press release that announced its 3-for-1 split made clear that its forward stock split was put in place to ensure that employees could more easily buy whole shares of the company’s stock. “Given our growth and our plans for the future, we felt it was a good time to split the stock and encourage our associates to participate in the years to come,” said Doug McMillon, CEO and President of Walmart.
Although this stock split won’t have any impact on Walmart’s operating performance, it, along with the addition of Amazon and removal of Walgreens Boots Alliance, will cause S&P Dow Jones Indices to adjust the Dow’s divisor. In other words, what $1 in share price equals in Dow points on Friday, Feb. 23 won’t be the same come Monday, Feb. 26.
Furthermore, Walmart’s stock split will cause the company to lose substantial influence within the Dow. Despite rallying to a new all-time high following the release of its fourth-quarter operating results this week, the company is on pace to be a $58 stock after its split is conducted. It’ll move from the 17th most influential stock in the Dow to the 26th!
A new era for the ageless Dow Jones Industrial Average is right around the corner.
— Sean Williams
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Source: The Motley Fool