General Electric Gets Kicked Out of the Dow

General Electric was the last of the 12 originals remaining in the Dow Jones Industrial Average. Although it was removed from the Dow for 6 months in the 1890s and from 1901-1907, GE has been a continuous member of the Dow since 1907. But in June 2018, the stewards of the DJIA announced that GE would be replaced by Walgreens.

A History of the Dow

The Dow Jones Industrial Average (“the Dow”) is a stock market index, used to assess movements in the U.S. stock market and its overall strength or weakness. It was created in 1896 by Wall Street Journal editor and co-founder of Dow Jones & Company, Charles Dow. Dow Jones & Company owns the Wall Street Journal.

The Dow tracks the market performance of 30 American companies and initially, the Dow had only 12 stocks. These included such golden oldies as American Cotton Oil Company, U.S. Leather Company, and Distilling & Cattle Feeding Company. In 1920, the Dow expanded to 20 stocks and then to 30 stocks in 1929.

Due to its age, the Dow Jones Industrial Average represents a continuous chart of our nation’s economic growth, along with its ups and downs. The Dow first hit 1,000 in late 1972; hit 10,000 in March, 1999; and reached 25,000 in January 2018.

Members of the Dow

The Dow has always contained the heavyweights. However, the exact composition of the Dow has changed at various times over the last 120 years, even though most individual stocks stay in the Dow for years. The biggest companies are periodically replaced by even bigger ones.

As the economy moved from heavy industry to consumer goods to technology, the Dow’s membership has changed to reflect the market. Currently, about two-thirds of the Dow are industrial companies, while the other one-third include companies like McDonald’s, Microsoft, and American Express.

When one company enters the Dow, another has to leave. The most recent change in membership came in March, 2015, when Apple’s entry pushed out AT&T, a continuous member since 1916. Before that, the most recent change saw Goldman Sachs, Nike, and Visa join in September, 2013, while Alcoa, Bank of America, and Hewlett-Packard had to leave.

So, who decides which companies are allowed into the club of 30 companies used for the Dow Jones Industrial Index? Surprisingly, newspaper editors! Dow Jones owns the Wall Street Journal, where Charles Dow was once the editor. As a result, the editorial board of the Wall Street Journal decides who gets into the Dow 30 and who leaves. These changes do not happen very often, however. And yearly company success in the market is hardly the only factor.

More Bad News for GE

Being unceremoniously booted from the Dow is the latest of some pretty bad news for GE, which has spent the last few years dealing with cash flow challenges and, by some estimations, bad deals. And last year, GE was the worst-performing stock in the Dow, losing about half of its value – and it is down another 25% this year.

Is Being Kicked Out a Bad Thing?

Without question, the executives at GE would much rather remain a part of the Dow, but recent history suggests that stocks leaving the Dow actually do better a year after their removal compared to those that are added.

According to the WSJ Market Data Group, since 1999, 17 stocks have joined the Dow and, as you might expect, 17 were removed. But here are some interesting stats:

The average performance one year after being added to the Dow is -8%
The average performance one year after being booted is essentially flat, at -0.6%•
The last five changes have seen a 3% rise for additions and a 43% rise for those stocks exiting.

Does it Matter?

Let’s be crystal clear: PAST PERFORMANCE IS NO INDICATION OF FUTURE RESULTS.

In other words, it’s probably not a great idea to rush out and buy GE. And it’s probably not a great idea to short Walgreens.