GE’s Exit from Dow Index May Be a Blessing in Disguise

Business June 26, 2018

The Dow Removal Trend

Media outlets reported that the exit of General Electric from Dow Jones might not be so bad for the company. As indicated by the Bespoke Investment Group, most of the stocks which were pulled from the Dow Jones Industrial Average since 1999 recorded better returns than the replacing stocks in the year that followed the switch. BIG further reported that while the median return for the 17 stocks removed from the Dow Jones Industrial Average was flat, they still performed better than the median drop of 6% for the newly added stocks.

Sources claimed that since 2013, the returns of the stocks removed from Dow index had done better than the newly added stocks by an extensive margin. For instance, BIG reported that within a year after Apple replaced AT $ T in March 2015, AT&T’s shares rose with over 17% while Apple experienced a 17% drop in its shares. Also, the shares of Bank of America rose by 21%, Alcoa by 90% and Hewlett-Packard rose by 69% after they were removed from the Index in September 2013. Visa, Nike, and Goldman Sachs replaced the removed stocks, and their stocks only rose by 8%, 16% and 12% respectively.

Sources reported that the shares of GE had fallen with over 3% since June 19 when the switch was originally announced, while the stocks of Walgreens Boots Alliance rose by almost 5% since the announcement of the switch. An analyst at Goldman Sachs, Joe Ritchie, however, stated that the forced exit of General Electric might have a positive effect on the company. According to Ritchie in a note addressed to investors, while it may be an adverse development at the moment, he drew their attention to the fact that all the recently removed stocks had performed better than their replacements in 12 months following the initial announcement.

Bloomberg reported that GE’s stock had already been halved in the past trading year and went for a price seven times lower than its earnings.

The Implication(s) of GE’s Exit

Media outlets reported that General Electric which is currently going through a restructuring championed by its new CEO, John Flannery, might not be a sell candidate when it exits the Dow after the close of trading on Monday.

As noted by Bloomberg, GE’s stock had already been halved in the past trading year and went for a price seven times lower than its earnings. On the other hand, it had been suggested by media outlets that the trend of new entrants performing terribly on the Dow Index could also affect Walgreens Boots Alliance, GE’s replacement. However, BIG emphasized that they wouldn’t expressly state that GE’s removal from the Dow index necessitated a call to buy the stock, but it also ought not to be a reason for its sale.

Drug Retail Chain Replaces GE

General Electric was reportedly removed from Dow Jones Industrial Average because of its ongoing issues and replaced by Walgreens, a drug store retail company. The replacement was announced by S&P Dow Jones Indices after the close of trading last week Tuesday, and it marked the first since March 2015 when Apple replaced AT& T.

Media outlets reported that the chairman of the index committee at Dow Jones, David Blitzer, made no reference to GE’s troubles and the current restructuring going on. Blitzer only referred to how the economy had experienced changes since GE came on board its DJIA in 1896.

As explained by Blitzer, the importance of industrial companies had relatively diminished, and more prominence was given to healthcare, finance, technology and consumer companies. He also added that the inclusion of Walgreens Boots Alliance made DJIA more representative of the interest of companies in the healthcare and consumer sectors of the economy.

David Blitzer stated that the inclusion of Walgreens Boots Alliance made DJIA more representative of the interest of companies in the healthcare sector

Sources reported that GE’s stock had been under pressure for a while and had gone down about 26% since the trading year began. Media outlets stated that the company under the leadership of the new CEO began to take active measures to restructure the company.

Some of the steps included halving dividends and cutting thousands of jobs in a bit to get the company back on course following several wrong steps that caused shrinks to its earnings under the former CEO. Media outlets reported that Walgreen’s entrance into the Dow came at a period when there were worries that trade disputes between the US and China could lead to major conflicts that would cause severe harm to the global economy.