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Dow 30: GE Out, Walgreens In. Why it Matters.
00:08:31
After being a member of the Dow Jones Industrial Average group of 30 stocks since 1907, General Electric is being dropped from the list and Walgreens is being added. Wall Street Journal markets reporter Michael Wursthorn explains the significance.
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- [00:01]
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- [00:18]
J.R. Whalen
Money in Market stories from the Wall street journal. I'm J.R. whalen in New York. Walgreens is entering the Dow Jones Industrial average group of 30 stocks, and GE is leaving. Why is that significant? We'll explain in a moment. First, these money headlines. The cost of a gallon of regular gas has jumped to a nationwide average of $2.88 as of mid June from $2.32 a year earlier. That's the word from the U.S. energy Information Administration. But the news isn't all bad. While the cost of gas has soared almost 22% in the past year, the cost of food has risen only 1.2%. And food prices have slowed since the start of 2018, rising only about one third as rapidly as they did a few years ago. Sales of previously owned U.S. homes declined in May for the second consecutive month, signaling that a run up in prices, rising mortgage rates and limited inventory may be holding down home purchases during the spring buying season. Compared with a year earlier, sales in May were down 3%. And May's home sales extend a slow spring selling season. Sales have fallen on an annual basis for three straight months. Meanwhile, the Wall Street Journal heard on the street team argues that home prices are not likely to come down anytime soon and has a lot to do with supply and how few homes are being built even now, nine years after the recession ended. Plus, big home builders don't have much of an incentive to seriously step up the pace of construction. They face less competition than they did in the past. Many smaller operators were wiped out in the housing bust, and rising material and labor costs are a further disincentive for boosting production. This is your Money briefing from the Wall Street Journal. Welcome back, everybody. Walgreens is in and GE is out of the Dow Jones Industrial Average. That is now. Why is that significant? Well, Wall Street Journal markets reporter Michael Wersthorne is here to discuss. So, Michael, we're speaking of the 30 stocks in the Dow Jones Industrial Average. What is that group of stocks and what does it tell us about the market?
- [02:19]
Michael Wersthorne
It's a group that's created by an index, an index committee. Their goal is to choose 30 stocks that are representative of the economy as well as the stock market. That list changes. It's not based on, say, quantitative measures like the S&P 500, so it's largely at the discretion of this committee. But they do try to adhere to some simple principles and that is they don't want the makeup to drift too far from where the economy is now. That's why you've seen over the last several years the shift away from industrials more toward technology and a focus too, in some cases on say, consumer, such as with the recent addition of Walgreens. But it's supposed to be a pretty close representation of just how the broader US is functioning and moving ahead.
- [03:07]
J.R. Whalen
While GE's departure from the Dow 30 list is significant, it certainly isn't the first time this happened. Other companies have been brought out of the Dow 30. Others have been brought in.
- [03:17]
Michael Wersthorne
There's in fact been, I believe, 51 changes to the Dow industrial since it was founded in 1896. The most recent one before GE was in 2015 when Apple replaced AT&T. It's common, if anything, over the last several years, you've seen the pace of the changes pick up a bit. They're not just when it comes to whether or not a company is maybe in bankruptcy or is going through a merger and acquisition. You've seen these changes happen just because of whether there may be something fundamentally shifting within the company itself.
- [03:49]
J.R. Whalen
In GE's case, it's been a member of the 30 stock index since 1907, but its recent financial troubles lessened its place as a barometer of the overall economy.
- [03:58]
Michael Wersthorne
It was a continuous member since 1907, but in fact it was one of the original 12 members when the index was created in 1896. It fell out, came back in. What led to this most recent expulsion is the fact that ge, since especially last year, has gone through an incredible transformation and attempt to write its business. It changed CEOs, it's contemplating a breakup of its business. It cut its very highly coveted divide, all that. As those things were going on, investors were increasingly speculating whether or not this would mean the end for one of the oldest component that was still remaining in the Dow Jones Industrial Average.
- [04:39]
J.R. Whalen
Let's not forget about Walgreens and this whole equation. It is a powerhouse company and that earned it a place in the Dow 30.
- [04:46]
Michael Wersthorne
What's interesting about it too is that it's a retail company. A lot of the focus that we've seen in the stock market has been around whether retail can survive the Amazon shift. I think Walgreens has done some, some interesting work in pivoting and trying to take advantage of the shift in healthcare behavior among consumers. Just the shifting landscape and how consumers want to shop and interact with this addition, it's going to be interesting to see how long it can maintain that position considering that a lot of investors are still trying to figure out where does retail go from here? Walgreens. While it has made some changes, it's got a lot of unanswered questions. How does it continue as a company that's farther flung from what originally was as this drug store pharmacy provider?
- [05:34]
J.R. Whalen
There's an irony here. You point out in your story, GE's market cap is still twice as large as United Technologies, which is still a Dow 30 stock. Can you explain that?
- [05:44]
Michael Wersthorne
As of June 19, General Electric still had a bigger market cap than five other Dow constituents that include, as you said, United Technology Caterpillar, which is a big influencer in the Dow. All that said, it doesn't really matter so much what the market cap is of these underlying companies. What matters more is the actual stock price. So you'll see in the Dow Jones Industrial Average companies like Boeing and Caterpillar, their share prices trade fairly high, certainly higher than GE, which is say around $12 a share as of June 19th. They have a much bigger influence in the stock. If Caterpillar were to gain $5$6 a share, that immediately leads to at least a 30 to 45 point swing in the Dow Jones Industrial Average. GE might see a bigger percentage move, but because its share price is so much lower, it just doesn' same effect overall. While it's really interesting that GE, it's fallen a lot since those highs in 2000 when it was once the most valuable company in the US Its market cap still is a fairly respectable size in the public stock market.
- [06:50]
J.R. Whalen
Just to be clear, when a company's inclusion in the Dow 30 could draw attention to it, its place in that list does not directly influence its performance as a stock. It's really just there as a measuring stick. Is that fair to say?
- [07:02]
Michael Wersthorne
That is fair to say. The one thing I'd add too is that one of the reasons why you probably wouldn't see a massive change in the stock price because of an announcement like this is because the Dow Jones Industrial Average just doesn't see the same number of index funds that track it compared to the S&P 500. The S&P 500 has something like nearly $10 trillion of assets through various types of mutual funds, ETFs that all track it. When a company goes in and out of there, you'll see some move, but it'll be a little more magnified than you see than Dow Jones Industrial Average, which is something about $25 billion of money that tracks that overall, its inclusion and exclusion isn't going to really make or break for ge. In fact, there's been several companies like bank of America, I believe at&t as well that have seen share price increases since they were removed from the index over the last several years.
- [07:54]
J.R. Whalen
The Dow Jones Industrial Average, is that related to the Dow Jones Company we work for here at the Wall Street Journal?
- [08:01]
Michael Wersthorne
Point it was when the index was first founded. Charles Dow was one of the writers of it, one of the first editors of the Wall Street Journal. Over the years that has changed as Dow Jones itself has divested itself of its index business. The relation that we still have besides the name though is that the Wall Street Journal has two seats on the indexing committee that helps decide what companies get to go in and go out of the index. There's still a relationship there, but just not as tight as it first was when that index was first created.
- [08:31]
J.R. Whalen
All right. And that is about everything you wanted about the Dow 30, but you were afraid to ask. But you listened to the right podcast and that is Wall Street Journal markets reporter Michael Wersthorne joining us here in our studio. Michael, thanks for being with us.
- [08:42]
Michael Wersthorne
Thank you.
- [08:43]
J.R. Whalen
And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.
- [08:48]
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