New York City, USA: General Electric Co. GE, an original member of the Dow Jones industrial average, will be replaced by drugstore retailer Walgreens Boots Alliance WBA, when trading begins on June 26.
GE was a constituent of the Dow when the index was created in 1896, and has been a member of the 30-stock index continuously since 1907.
With the departure of GE and the addition of Walgreens, “the DJIA will be more representative of the consumer and health care sectors of the U.S. economy,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices, the company behind the Dow. “Today’s change to the DJIA will make the index a better measure of the economy and the stock market.”
“We are focused on executing against the plan we’ve laid out to improve GE’s performance,” a GE spokeswoman said. “Today’s announcement does nothing to change those commitments or our focus in creating in a stronger, simpler GE.”
In the 1990s GE was the largest US company by market capitalisation, and as recently as 2009 was one of the five-largest listed groups in the world. It has been hit by a series of problems including downturns in the market for gas-fired power plants and oilfield services, and legacy liabilities from insurance operations it sold in 2006. Last year it was forced to cut its dividend, for the second time since 1938.
GE has shrunk over the years. Under former CEO Jeff Immelt, the company shed its NBCUniversal media business and shrunk its GE Capital arm, which was once of the biggest U.S. lenders.
More recently, the Boston-based company struck a deal to sell its century-old railroad business, part of a plan to shed $20 billion worth of assets by the end of next year. It is also looking to sell its century-old lighting business.
GE shares have tumbled more than 50% over the past year, erasing more than $100 billion in wealth, as the company has switched leaders, slashed its dividend payment and pursued a restructuring that could result in a breakup of the struggling conglomerate.
GE’s decline has left it with a market value of $113 billion, but it wasn’t the smallest industrial in the venerable index. GE’s market cap and annual revenue are still larger than Dow member United Technologies Corp. , which manufacturers Otis elevators, Pratt & Whitney jet engines at $100bn and Caterpillar at $86bn.
In the broader S&P 500 index, GE is ranked 44th by market capitalisation.
GE’s market capitalization is still nearly twice as large as Walgreens’ valuation, though the two companies are about equal in terms of annual revenue. Walgreens, which dates back to 1901, has expanded in recent years by merging with European drug wholesaler Alliance Boots and buying up stores from rival Rite Aid Corp.
The decision also reflects the idiosyncratic nature of the Dow, which has 30 constituents weighted by share price rather than by market capitalisation. After falling 54 per cent in the past 12 months, GE’s shares were $12.95 at the market close on Tuesday, and it has much less effect on the index than members with higher share prices such as Goldman Sachs at $228 and Apple at $186.
Walgreens ended Tuesday’s session with a market value of $64 billion. It joins the index even though its larger drugstore rival CVS Health Corp. isn’t a member. CVS is in the process of buying health insurer Aetna Inc.
The shake-up won’t affect the value of the Dow, which fell 1.15% Tuesday and is down 0.1% this year. The index has surged to dozens of records in the past several years, most recently in January.
GE shares dropped about 1.5 per cent in after-hours trading on Tuesday following the announcement. Walgreens got a lift, rising 4.4 per cent.
That modest reaction reflects the fact that the Dow is little used by investment funds for tracking or benchmarking performance. About $29.6bn worth of assets tracks the Dow or is benchmarked against it, compared to $9.94tn that uses the S&P 500, according to S&P Dow Jones Indices.
In 2015, the committee committee which selects component stocks of the Dow, added Apple Inc. in place of AT&T Inc., which recently swallowed Time Warner Inc. The index has dropped several industrial members over the years, including Alcoa Inc. in 2013 and General Motors in 2009 after its bankruptcy filing.