Bank of America Gets Booted From the Dow

The Dow Jones Industrial Average became a little less industrial today. The committee in charge of selecting its components announced this morning that Alcoa (NYSE: AA  ) , Hewlett-Packard, and Bank of America (NYSE: BAC  ) would be replaced by Nike, Visa, and Goldman Sachs, respectively.

According to the press release announcing the move, the changes "were prompted by the low stock price of the three companies slated for removal and the Index Committee's desire to diversify the sector and industry group representation of the index."

AA Chart

Of the three companies, Bank of America was the most recent addition, getting listed on the index at the beginning of 2008. At the time, shares of the nation's second largest bank by assets were trading for more than $40 per share, making it one of the two largest American companies by market capitalization that weren't already on the blue-chip index.

The fortunes of the bank soon changed, though, with the onset of the financial crisis. One year after being added to the index, its shares dropped by more than 91%, all the way down to nearly $3 per share.

It was an epic collapse, matched only by the similarly dismal performance of Citigroup (NYSE: C  ) , which led to its own delisting from the Dow Jones Industrial Average in 2009.

"We were reluctant to remove Citigroup at the height of the financial frenzy," said Robert Thomson, managing editor of the selection committee at the time, "but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake."

The question now is: What will be the impact on Bank of America's shares going forward?

The answer to this is twofold.

In the first case, there's reason to believe its shares will be less volatile, if only marginally so, as it remains a member of the more heavily tracked S&P 500. You can see this in the respective sizes of the largest exchange-traded funds following the two indexes. The SPDR S&P 500 (NYSEMKT: SPY  ) has $136 billion in assets under management, while the SPDR Dow Jones Industrial Average (NYSEMKT: DIA  ) has $11.7 billion in net assets.

At the same time, there's no reason to believe it will have any impact on the value of Bank of America's shares. This is first and foremost a function of Bank of America's earnings and book value. Anything else is largely noise to the committed investor.

Have you missed out on the massive gains in bank stocks over the past few years? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2630145, ~/Articles/ArticleHandler.aspx, 12/22/2014 7:27:00 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement