The Dow Jones Industrial Average is going to be a little less “industrial” come August 31.
S&P Dow Jones Indices, the global index provider that oversees the Dow Jones Industrial Average, announced earlier this week that the venerable index (1928) will replace three of its components as of the market open on Monday, Aug. 31.
Specifically, Salesforce.com (NYSE:CRM) will replace Exxon Mobil Corp. (NYSE:XOM), Amgen Inc. (NASD:AMGN) will replace Pfizer Inc. (NYSE:PFE), and Honeywell International Inc. (NYSE:HON) will replace Raytheon Technologies Corp. (NYSE:RTX).
‘Split’ Decisions
This was all set in motion by DJIA constituent Apple Inc.’s (NASD:AAPL) decision to split its stock 4:1, which reduced the index’s weight in the Global Industry Classification Standard (GICS) Information Technology sector, and the changes above “help offset that reduction.” According to a press release, they also “help diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy.”
Pfizer has been in the Dow since 2004, Raytheon Technologies has been a part of the Dow in some form since 1939, while Exxon Mobil (XOM) joined the Dow Jones Industrial Average in 1928—and was the industrial average's longest-lasting component.
It’s worth remembering that the Dow Jones Industrial Average is weighted by price—so that the higher the nominal share price, the more effect the stock has on the index’s performance—unlike other indexes (such as the S&P 500) that are weighted by market value, and thus the more valuable the company, the higher its index weight.
That said, the changes won’t disrupt the level of the index, because the divisor used to calculate the index from the components’ prices on their respective home exchanges will be changed prior to the opening on Aug. 31, 2020. According to S&P Dow Jones Indices, this procedure “prevents any distortion in the index’s reflection of the portion of the U.S. stock market it is designed to measure.” The new divisors can be found in the end-of-day index level files (*.SDL) via the S&P Dow Jones Indices FTP (EDX) site beginning on Friday, Aug. 28, 2020.
Sales ‘Force’
According to Kiplinger’s, Apple currently is the largest component of the Dow by virtue of its $500-plus share price, which is almost $200 per share more than the second-largest component, UnitedHealth Group (UNH). However, once AAPL shares start trading on a split-adjusted basis Aug. 31, that price will drop down to about $125 per share. At that price, Apple would plummet to the middle of the DJIA “pack.”
That reduction prompted the need for more weight to tech, which comes via Salesforce.com—which now stands to be the sixth-largest component in the Dow.
Dumping Exxon Mobile means that the only energy component remaining in the Dow is Chevron (CVX).
However, while Exxon Mobile has been a member of the Dow since Oct. 1, 1928 (when the index was expanded from 20 to 30 components), at that time it was known as Standard Oil Co. of New Jersey. The company wasn’t unveiled to the world as “Exxon” until 1972, and it didn’t become ExxonMobil until its megamerger with Mobil in 1999, according to S&P.
